The Role of Price and Cost Competitiveness for Intra- and Extra-Euro Area Trade of Euro Area Countries

63 Pages Posted: 25 Aug 2016

See all articles by Elena Bobeica

Elena Bobeica

European Central Bank (ECB)

Styliani Christodoulopoulou

European Central Bank (ECB)

Olegs Tkacevs

Latvijas Banka

Date Written: August 24, 2016

Abstract

This paper studies the importance of price and cost competitiveness for intra- and extra-euro area trade flows of euro area countries. A standard error correction framework shows that price competitiveness is a relatively more important driver of trade flows outside the euro area as compared to those within the monetary union, especially for exports, that tend to be more sensitive to relative prices than imports. We consider various measures of competitiveness and conclude that it is difficult to single out one that outperforms the others; based on an encompassing test, measures based on labour costs appear to contain relatively more information for trade flows, particularly for exports outside the euro area.

The key policy implication is that to adjust competitiveness disequilibria within the monetary union, measures besides those aimed at price and cost adjustments should be pursued in the deficit countries, such as structural policies fostering non-price competitiveness.

Keywords: price and cost competitiveness, intra- and extra-euro area trade, error correction model

JEL Classification: F14, F15, F41

Suggested Citation

Bobeica, Elena and Christodoulopoulou, Styliani and Tkacevs, Olegs, The Role of Price and Cost Competitiveness for Intra- and Extra-Euro Area Trade of Euro Area Countries (August 24, 2016). ECB Working Paper No. 1941, Available at SSRN: https://ssrn.com/abstract=2828603

Elena Bobeica (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Styliani Christodoulopoulou

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Olegs Tkacevs

Latvijas Banka ( email )

K. Valdemara iela 2a
Riga LV-1050
Latvia

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