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Prepared by Herman Bennett and Ziga Zarnic (LICOS - KU Leuven).
The concept of REER is the most commonly used measure of international competitiveness and is frequently used in policy and academic discussions. See Agenor (1995), Catao (2007), Chinn (2006), Fung and Klau (2006), Marsh and Tokarick (1996), Neary (2006), and Rogoff (1996) for further references to the concepts of REER and real exchange rate.
This study is based on Bennett and Zarnic (2007), which presents the complete description of the methodology, data and the full set of results. Due to lack of consistent data across countries, our analysis centers on the external markets where each country competes with local producers as well as with other foreign exporters. Our analysis suggests that incorporating internal market competition to this framework does not change the conclusions of this study (differences are below 1 percent).
The available data on disaggregated bilateral trade in services is not as complete as the data for trade in goods, and therefore, our estimates of the REER in services are limited to the sample of trade flows available. The average coverage of bilateral trade is 89 percent of services exports for Greece, 70 percent for Italy, 83 percent for Portugal, 59 percent for Spain, 80 percent for France, and 54 percent for Germany. The coverage for goods is above 90 percent for all countries. Note also that the share of total exports of services in total exports is 66 percent for Greece, 20 percent for Italy, 28 percent for Portugal, 32 percent for Spain, 21 percent for France, and 14 percent for Germany. Our complete data set has over 36 million observations and includes prices data from 1995 until 2006; bilateral trade data for goods from 1995 to 2005; and bilateral trade data on services from 1999 to 2004. We compute the results for services from 1998 to 2006, for which we extrapolate the information observed in trade of services during 1999 and 2004 into 1998 and 2005, respectively.
The standard IMF-WEO estimates of the REER (based on Bayoumi, et al 2005)—the closest source to our methodology that includes the latest developments in the literature and uses the HPA—indicate a real appreciation of 13.6 percent for Greece between 1998 and 2006, 28.9 percent for Italy, 3.6 percent for Portugal, 18.6 percent for Spain, and a real depreciation of 3.5 percent for France and of 11.3 percent for Germany. Our estimates as well as the IMF estimates reported include ULC data as of August 23, 2007.