Appendix. Technical Notes
Blanchard, Olivier and Francesco Giavazzi, 2002, “Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?” Brookings Papers on Economic Activity, vol. 2002, No. 2, pp. 147–186.
Borio, Claudio, Piti Disyatat and Mikael Juselius, 2013, “Rethinking Potential Output: Embedding Information about the Financial Cycle”, BIS Working Papers No.404, Basel.
Chen, Ruo, Gian-Maria Milesi-Ferretti and Thierry Tressel, 2012, “External Imbalances in the Euro Area”, IMF Working Paper No. 12/236, Washington DC.
European Central Bank, 2012, “Competitiveness and External imbalances within the Euro Area”, ECB Occasional Paper No 139, Frankfurt.
Kang, Joong Shik and Shambaugh C. Jay 2013, “Progress Toward Internal Devaluation in the GIPS and the Baltics,” manuscript, IMF.
Laeven, Luc and Thierry Tressel, 2013, “The European Union: Financial Integration and Fragmentation in the European Union”, European Union Financial Sector Assessment Program Technical Note, IMF Country Report No. 13/71, March 2013.
Prepared by Thierry Tressel and Shengzu Wang (EURAE).
GDP deflator based REER are good proxies for value-added REER that reflect the vertical integration of trade. See e.g., Rudolfs Bems & Robert C. Johnson, 2012. “Value-Added Exchange Rates,” NBER Working Papers 18498.
Some measurement errors could exist since the proxy of export price is the unit export value for goods actually sold, which may not fully capture pricing-to-market behaviors or cover transaction prices.
See Appendix for a definition of traded and non traded sectors.
Labor shares in the gross value-added have been declining in the past decade in the euro area, with sharp spikes during the 2008/09 crisis period when output and trade collapsed. In the periphery such as Spain, labor share has been declining since the crisis, reflecting both labor shedding and rising profit margins in the tradable sectors.
An alternative analysis (work in progress) uses relative GDP deflators as indicators of relative price adjustment.
We replicate the analysis, using the same relative prices elasiticities, but with GDP deflators instead of CPIs as measures of relative prices. Using the same elasiticities allows us to assess the impact of using GDP deflators instead of CPIs on the contribution of each variable to export performance.
Other factors considered structural, but of little relevance for this analysis include capital controls, reserve accumulation, whether the country is a financial center. The regression also includes the oil trade balance for a few countries where it exceeds 10 percent of GDP.
International Monetary Fund, Regional Economic Outlook: Europe. May 2011.
The assessment is based on the output gap and potential output estimates of each WEO vintage. There is an ongoing debate on how potential output and output gap should be estimated in real time, included to better capture financial cycles. See for instance Borio C., Disyatat, P., and M. Juselius, 2013, “Rethinking Potential Output: Embedding Information about the Financial Cycle”, BIS WP 404. Our analysis does not enter in those considerations.
The impact of a decline in the output level on the current account is theoretically and empirically ambiguous as noted above: while the neoclassical effect tends to lower the CA balance (as the distance to the TFP frontier increases), the decline in potential output has the opposite effect (as consumption falls by the permanent component of the reduction in income). In the case of Greece, the first effect decreases the CA to GDP ratio by 0.11 percentage points, while the second effect increases the CA to GDP ratio by 0.45 percentage points. See appendix table for details.
It is also interesting to see that Greece’s top three competitors in the world market are Spain, Portugal, and Italy, with very low correlations of trade specialization with China or Hong Kong.