NEW EFFECTIVE EXCHANGE RATE INDEX FOR THE PORTUGUESE ECONOMY*

Transcription

1 NEW EFFECTIVE EXCHANGE RATE INDEX FOR THE PORTUGUESE ECONOMY* Ana Cláuda Gouvea** Carlos Combra** 1. INTRODUCTION Effectve exchange rates are ndcators of the purchasng power of currences and, when properly deflated, ther change s an ndcator of developments n the external compettveness of the economy. Ths paper presents an updated nomnal effectve exchange rate ndex for Portugal (NEERIP), whch corresponds to an nternatonal goods trade structure encompassng a hgher number of countres than those consdered for the calculaton of the prevous ndex (1). Ths update was necessary due to changes n the nternatonal trade structure on whch the prevous of the ndex (datng from 1990) was based. In addton, two real ndces are presented, usng consumer prce ndces and GDP prce ndces to deflate nomnal changes n exchange rates. Wth the mplementaton of Stage Three of Economc and Monetary Unon a number of nsttutons started to calculate euro effectve exchange rates, namely the European Central Bank publshes, on a regular bass, n ts Monthly Bulletn effectve exchange rates, n nomnal and real terms, for the euro area as a whole (2). However, for each partcpatng country t remans mportant to obtan natonal effectve exchange rate ndces, whch replace the prevous effectve exchange rates of * The vews expressed n ths paper are those of the authors and do not necessarly concde wth those of Banco de Portugal. The authors thanks to the colleagues from the Economc Research Department and the Markets and Reserve Management Department for ther suggestons and comments. Any remanng errors are the authors responsablty. ** Statstcs Department. (1) See Vdal, Mara José and Balcão Res, Teresa (1994). ther currences, gven that ther ndvdual behavour s dfferent from that of the euro area as a whole. In fact, each country has a dfferent external trade structure, namely regardng the relatve mportance of the several ntra and extra-euro area tradng partners, dfferent domestc developments n terms of prces and producton costs, dfferent nsttutons and dfferent ways to conduct natonal economc polces. Moreover, f n nomnal terms the change n the effectve exchange rate ndces translates exchange rate developments of the euro aganst the currences of extra-euro area tradng partners (whch n the case of the Portuguese economy have a mnorty part on external trade (3) ), n real terms, the change n the effectve exchange rate ndex also reflects changes n the relatve behavour of nflaton and producton costs between natonal economes belongng to the euro area. Thus, the real effectve exchange rate ndex s stll mportant as an ndcator of the external compettveness of the economy. However, a real effectve exchange rate ndex s an external compettveness ndcator n the narrow sense, gven that compettveness s assessed only n terms of the relatve change n prces or costs. In fact, ths ndex does not reflect other qualtatve factors relevant for the overall compettveness of the economy, such as the ablty to nnovate, the qualty of the product or the ablty to adapt to market demands. (2) Other nsttutons, e.g. the European Commsson, IMF and OECD, also publsh these rates. (3) In 2003 extra-euro area trade accounted for 33.2 and 28.9 per cent respectvely of exports and mports of goods. Banco de Portugal / Economc bulletn / December

2 Ths paper s organsed as follows: Secton 2 dscusses the methodologes underlyng the calculaton of effectve exchange rates, endng wth a summarsed descrpton of the methodologes used by some nternatonal bodes and central banks; Secton 3 presents the new nomnal effectve exchange rate ndex and two real effectve exchange rate ndces; the last secton presents the conclusons, where the man results obtaned are summarsed. 2. METHODOLOGICAL ASPECTS 2.1. Methodologcal optons to be consdered The nomnal effectve exchange rate (NEER) of country j s generally obtaned as a geometrc average of blateral nomnal exchange rates accordng to the followng formula: NEER j N 1 e where N s the number of tradng partners consdered, e j, s the exchange rate of the currency of partner aganst the currency of country j and W s the total weght assgned to partner. Anncrease n the rate reflects an apprecaton of the value of the currency of country j. The real effectve exchange rate (REER) s calculated by deflatng the nomnal effectve exchange rate:, j N de REERj 1 d j, j W W,, where d j and d are, respectvely, the deflator of the country for whch the real effectve exchange rate s calculated and the deflator of partner. The use of these formulas mples the determnaton of the partners to be consdered, the method and the reference perod for the calculaton of weghts W, and, to obtan the ndex n real terms, the deflators to be used. Optons n ths respect should depend on the purpose underlyng the calculaton of ths ndcator and also on operatonal aspects, namely regardng the regular avalablty and the statstcal qualty of the nformaton to be used. If, as usual, real effectve exchange rates are used to buld external compettveness ndcators, blateral exchange rates to be selected should correspond to partners wth whch the country has more sgnfcant trade relatons. Wth regard to the weghtng method, the purpose s to obtan a proxy for the effectve weght that each currency has n external trade relatons of the country for whch the ndex s calculated. The most frequently used method mples the calculaton of blateral weghts for mports and double weghts for exports (4). The mports blateral weghts reflect the weght of partner n mports of country j from the group of partners consdered. Thus, the weght of country n the ndex of j s gven by: M m j Wj, Mj where M j are the mports of j from and M j are the mports of j from the partners consdered. Weghts assgned to exports are double weghts that take nto account, n each market, the competton of the domestc producer and other exporters. The weghtng of country n the exports of j, W j, results from the combnaton of the weght of the tradng partner n the total supply of each market wth the mportance of that market for the exports of the country for whch the ndex s calculated,.e.: k X Y X x j j Wj X j Y Xh k X X j k, k Yk Xh h, j hk, j where X refers to exports (the ndex n the lower corner stands for the country of orgn and the ndex n the upper corner stands for the country of destnaton) and Y Y k represents the domestc producton of country (country k). The followng example shows the calculaton of the relatve weght of the pound sterlng n the context of exports (country j, n ths case, s Portugal and country s the Unted Kngdom). In order to obtan ths weght, frst t s necessary to determne the weght of the domestc producton of the Unted Kngdom n ts domestc market ( Y / Y X ) h, j h k k and n the remanng markets ( X / Y X ) k h k, j h. These weghts reflect, respectvely, the competton faced by the Unted Kngdom producton n (4) For a more detaled descrpton of the double weghtng method see Turner, Phlp and Van t dack, Jozef (1993). 64 Banco de Portugal / Economc bulletn / December 2004

3 the domestc and external markets. Second, each of these markets s weghted by ts relatve mportance n Portuguese exports (Xj / Xj n the case of k the Unted Kngdom domestc market and Xj / Xj n the remanng cases). Fnally, total weghts are a lnear combnaton of both partal weghts: W j M j W Mj X j m j X j W x j Mj X, j where the weghtng factor s the weght of mports or exports of j n ts total external trade n the markets consdered. The Internatonal Monetary Fund created a trple weghtng scheme where double weghts were calculated for 143 categores of manufactured goods, afterwards they were aggregated usng the weght of each category of goods n total exports of manufactured goods. The complexty of ts applcaton together wth the neglgble gans obtaned led to the dscontnuance of ths method (5). Regardng the selecton of the reference perod for the calculaton of weghts, t mght appear that the deal soluton would be to admt that ths perod s always the most recent possble,.e. a reference perod updated on a yearly bass. However, the choce of tme varyng weghts rases some problems of a practcal nature. One of them results from the need to nclude one adjustment element that makes t possble to obtan consstent results between the end of each reference perod for the calculaton of the weghtng structure and the begnnng of the new reference perod. Assumng that the weghts are annual, a possble calculaton formula for the annual effectve exchange rate would use an adjusted ndex (6) : NEER NEER t t1 e e W ; t jt,;, W ; t jt,; 1 where t and t-1 refer, respectvely, to the year that corresponds to the new reference perod and to the prevous year. Moreover, for the current year and whle nformaton s not complete, the new weghts are not avalable and therefore the weghts for the prevous year must be used, or any (5) See Zanello, Alessandro and Desruelle, Domnque (1997), pp other expedte soluton, thus ntroducng a methodologcal dscontnuty. Another problem results from the use of very recent data that may be revsed. Indeed, the revsons of the seres of external trade flows are generally very frequent and, sometmes, of a great magntude, whch brngs nstablty to the determnaton of weghtng structures. These aspects led to the choce, n most cases, of fxed weghts. These fxed weghts are often derved va an average of external trade structures correspondng to a few years, usually 3-year averages, n order to obtan a weghtng structure that s not sgnfcantly affected by rregular fluctuatons. If these fxed weghts are updated at regular ntervals, the dfferences resultng from the use of tme varyng weghts wll obvously tend to be neglgble. Wth regard to the deflators to be used, there s no deflator that, by tself, can gve an entrely satsfactory overvew of compettveness, even when t s consdered n the narrow sense n terms of relatve prces or relatve costs. All deflators have conceptual and/or statstcal lmtatons. As a consequence, takng nto account the relatve advantages of deflators and the ams of the analyss, several real effectve exchange rates are often constructed,.e. several deflators are used. Among the deflators that can be used for ths purpose, two types should be hghlghted: prce ndces and cost ndces. Several prce ndces may be consdered, of whch the most common are export prce ndces, producer prce ndces (PPIs) and consumer prce ndces (CPIs). The use of export prce ndces seems to be an obvous choce, gven the purpose that usually underles the computaton of real exchange rate ndces. However, n practce, these ndces correspond n fact to mere export unt value ndces (7), and thus they are not actual prce ndces. Moreover, the dfferent composton of the exports from the varous countres, as well as the change n that composton over tme can sgnfcantly affect ag- (6) Banca d Itala follows a slghtly dfferent method where the weght used s a smple average of the weght of the prevous year and the current year. See Banca d Itala (1998). The formula presented s followed, for example, by the Federal Reserve Bank. See Leahy, Mchael (1998). Banco de Portugal / Economc bulletn / December

4 gregate ndces. PPIs could be a more attractve alternatve, but ther use s serously hndered due to the lack of nternatonal harmonsaton n terms of the degree of coverage, methodology and publcaton calendar. CPIs are regularly calculated by many countres, wth consderable tmelness and, n the case of European Unon countres, ther calculaton follows some harmonsaton rules. However, they are affected by ndrect taxes, subsdes and prce controls. Moreover, they nclude non-tradable goods and exclude some tradable goods, n partcular ntermedate goods. Nonetheless, despte these features, the relatve operatonal advantages explan why they are commonly used to deflate nomnal effectve exchange rates. The most commonly used cost ndcators are unt labour costs (ULC) and GDP deflators. Usually, they are only made avalable wth some tme lag, partcularly n the case of unt labour costs, and wth a lower frequency (quarterly or even yearly). Unt labour costs do not reflect all relevant costs, such as captal costs. Generally, they are hghly volatle whch denotes, n some cases, sgnfcant problems n terms of statstcal qualty, and are often presented n terms of trends (8). The use of trends rases the problem of selectng the most adequate estmaton algorthm, namely regardng the treatment of the latest avalable observatons, whch are precsely those that deserve more nterest. Moreover, t s also necessary to choose the scope of the unt labour costs to be consdered, usually between unt labour costs n manufacturng (ULCM) and unt labour costs n the total economy (ULCT). ULCM are commonly used gven that manufactured goods are the man component of nternatonal trade. However, the growng mportance of servces n nternatonal trade also ponts to the use of ULCT. Gven that unt labour costs do not reflect all relevant costs, the GDP deflators, beng a more general measure, are naturally an alternatve to be consdered. Namely, they also reflect costs of captal utlsaton. However, they nclude non-market sectors and, as unt labour costs n the total economy, they cover goods that are not nternatonally traded. Moreover, the ndex usually made avalable refers to GDP at market prces. Wth regard to unt labour costs n the total economy GDP deflators have, however, some advantages that make ther choce as a deflator relatvely attractve. One of these advantages s that, n the large majorty of the developed economes, ths ndcator s made avalable on a quarterly bass and wth a relatvely short tme lag, n the context of the producton of quarterly natonal accounts Prevalng methodologes Effectve exchange rates are calculated by several central banks and nternatonal bodes. Ths secton presents the varous methodologes, wth specal emphass on those used by Banco de Portugal and the European Central Bank. a) Banco de Portugal The methodology used by Banco de Portugal for the calculaton of the nomnal effectve exchange rate ndex for Portugal (NEERIP) was frst presented n 1994 (9). In terms of the scope of external trade, t was decded to nclude only manufactured goods, gven ther relevance for Portugal n terms of external compettveness. The reference currency basket contnued to nclude 13 currences (10), coverng 81.9 per cent of the Portuguese (drect) external trade. The use of a larger basket would not have very relevant effects n terms of results. Moreover, by ncludng more countres, the tmely constructon of real ndces could be jeopardsed. The weghtng method was also revsed, wth double weghts replacng blateral weghts. Ths change amed at consderng not only blateral trade relatons but also competton n thrd markets. Fnally, the choce of the base perod for (7) Generally, for each group of products ncluded n a gven category of the external trade nomenclature, these ndces are orgnally derved through the rato of ts monetary value to the overall weght of these products. (8) See IMF, Zanello, Alessandro and Desruelle, Domnque (1997), p. 11. (9) See Vdal, Mara José and Balcão Res, Teresa (1994). (10) Deutsche mark, Belgan franc, French franc, Italan lra, Dutch gulder, Dansh krone, pound sterlng, Spansh peseta, US dollar, Japanese yen, Swedsh krona, Norwegan krone and Swss franc. 66 Banco de Portugal / Economc bulletn / December 2004

5 weghts fell on a sngle year, 1990, gven that t s a representatve and recent year. In practce, the choces made n terms of the above-mentoned varables made t possble to apply the weghts calculated by the Bank for Internatonal Settlements (BIS) (11), standardsed (12) to the 13-currency basket. The nomnal effectve exchange rate ndex for Portugal seres has a monthly frequency and has been regularly publshed n the Statstcal Bulletn of Banco de Portugal. The Annual Report of Banco de Portugal presents real effectve exchange rate ndces for Portugal, calculated usng the CPI and unt labour costs. These ndcator seres have a yearly frequency. b) European Central Bank (ECB) The ECB methodology for the calculaton of the euro effectve exchange rate (EER) (13) s largely based on the one presented by the BIS. The trade flows consdered by the ECB refer to manufactured goods. Servces were excluded due to the lack of data. Obvously, ntra-euro area trade was excluded. As for the choce of the basket of currences, they tred to fnd an equlbrum between the degree of coverage of external trade and the qualty of nformaton. Thus, two baskets were created, one nvolvng 12 ndustralsed or recently ndustralsed countres (14) and another, wth a wder coverage, nvolvng 38 tradng partners (15), ncludng emergng markets and transton economes. In the perod, these baskets covered respectvely 61 and 89 per cent of the euro area external trade n manufacturng goods. The crtera for the group of 12 were, n addton to sgnfcant trade lnks, the exstence of daly data on the exchange rate as well as a set of cost and prce ndces made avalable n due tme. In the wder group were ncluded the countres that fulflled at least one of the followng condtons: ndvdual share of the euro area trade hgher than 1 per cent; accesson country status; sgnfcant trade lnks wth ndvdual euro area countres. They also needed to have avalable monthly data on the CPI released n due tme and wth good qualty. Wth the 2004 revson, the group of 38 countres was extended to encompass Latva, Lthuana, Bulgara and Malta and another group of 23 countres was created, ncludng the 12 countres of the already exstng group, the 10 new EU Member States and Chna, whch wll be the reference group. In the perod, trade flows of the groups of 42, 23 and 12 countres represented respectvely 89.6, 74 and 59.8 per cent of the euro area external trade n manufacturng goods. The weghtng method adopted was double weghts and the base perod s fxed, snce t was consdered that changes n the pattern of nternatonal trade are very gradual, and therefore the weghts only need to be revsed at fve-year ntervals. The base perod was appled untl Thenceforth the reference perod was changed to The current EER seres results from the lnk between the two ndces n early The deflators appled to obtan the real effectve exchange rate (REER) are the consumer prce ndex (CPI), producer prce ndex (PPI), unt labour costs n manufacturng (ULCM), unt labour costs n the total economy (ULCT) and the gross domestc product deflator (GDPD). Whenever possble, the ECB apples harmonsed ndcators for EU countres. c) Other central banks and nternatonal bodes The methodologes appled by other nternatonal nsttutons and central banks are summarsed n Table 1. (11)For more detals on BIS methodology, see Turner, Phlp and Van t dack, Jozef (1993). (12)Theoretcally, ths standardsaton s not correct and weghts should be recalculated. However, n practce, results are very smlar. (13) For a detaled descrpton of the methodology, see Buldorn, Luca, Makrydaks, Stelos and Thmann, Chrstan (2002). The changes ntroduced n 2004 are summarsed n the September 2004 ssue of the Monthly Bulletn of the European Central Bank. (14) Australa, Canada, Denmark, Hong Kong, Japan, Norway, Sngapore, South Korea, Sweden, Swtzerland, Unted Kngdom, Unted States. (15)Includes the group of 12 countres and Cyprus, Czech Republc, Estona, Hungary, Poland, Slovena, Slovaka, Chna, New Zealand, Algera, Argentna, Brazl, Croata, Inda, Indonesa, Israel, Malaysa, Mexco, Morocco, Phlppnes, Romana, Russa, South Afrca, Tawan, Thaland, Turkey. Banco de Portugal / Economc bulletn / December

6 The choce of the scope of external trade fell manly on manufactured goods, owng to ther relevance n terms of nternatonal trade and to the good qualty of the data. However, n practcal terms, the defnton of manufactured goods adopted s slghtly dfferent. The basket of currences adopted vares wdely, and there are even nsttutons that opt for more than one basket. Banco de Portugal had one of the most reduced baskets, reflectng n part the relatvely hgh geographcal concentraton of the Portuguese external trade n goods. The double weghtng method s used by all the nsttutons presented n Table 1 (16), reflectng the fact that t s modestly complex but guarantees qute satsfactory qualty levels. However, t s mportant to take nto consderaton that there are some dfferences n the applcaton of ths type of weghtng. Most of the nsttutons presented adopted fxed weghts, takng as a bass the average of three consecutve years (n contrast to BIS, Banco de Portugal and Danmarks Natonalbank that took as a bass only one year). The others opted for tme (16)In the case of the ncluson of prmary goods, the double weghts no longer make sense, snce these are non-dfferentated goods wth only one nternatonal market. Table 1 COMPARISON OF THE METHODOLOGIES OF SOME CENTRAL BAN S AND INTERNATIONAL BODIES Scope of external trade Reference tradng partners Weghtng method Base perod of weghtng Deflators Banco de Portugal Manufactured goods 14 Double Fxed (1990) CPI, ULCM, ULCT European Central Bank Manufactured goods 12, 23, 42 Double Fxed (revsed at fve-year ntervals: ; ) CPI, PPI, ULCM, ULCT, GDPD IMF (a) REER (ULC) Manufactured goods 20 Double Fxed ( ) ULCM REER (CPI) Manufactured goods, prmary goods (excludng petroleum), toursm 146 (b) Double (Manufactured goods and toursm), specal (prmary goods) Fxed ( ) CPI BIS Manufactured goods 25 Double Fxed (1990) CPI, export unt value ndex (EUVI), ULCM European Comsson Merchandse 12, 24, 25, 34, 41 Double (only exports) Movng CPI, EUVI, ULCM, ULCT, GDPD OECD Manufactured goods 41 Double Movng CPI, ULCM Banca d It la Manufactured goods 24 Double Movng PPI, EUVI, ULCM Banco de Espa a Manufactured goods 14, 21, 28 Double Fxed ( ) CPI, PPI, EUVI, ULCM Danmarks Natonalbank Manufactured goods 25 Double Fxed (1995) CPI, ULC, hourly earnngs, hourly wage costs Bank of Canada Merchandse 16 Double Fxed ( ) CPI, ULCM, GDPD Federal Reserve Bank Merchandse excludng prmary goods (c) and mltary exports 18, 19, 37 Double Movng CPI Notes: (a) The Internatonal Monetary Fund (IMF) wll update ts methodology n the near future. See Bayoum, T., Jaewoo, L., Jayanth, S. (2004). Bank of England apples drectly the weghts calculated by the IMF. Recently a proposal for the revson of methodology was presented (Lynch, B e Whtaker, S., 2004), whch wll be appled n the Sprng The man changes suggested are the applcaton of tme varyng weghts (n year t, weghts based on t-2 are appled, whle t-1 weghts are not avalable) and the ncorporaton of external trade n servces, although wth some lmtatons. (b) The IMF calculates effectve exchange rates for 147 countres. However, for 16 of these countres, the CPI s not avalable, and therefore t s not possble to calculate the REER ncludng ths subgroup. (c) From January 2002 onwards, exports of agrcultural goods are not excluded. 68 Banco de Portugal / Economc bulletn / December 2004

7 varyng weghts. Fnally, almost all nsttutons use the CPI as a deflator. ULCM are also qute common. 3. EFFECTIVE EXCHANGE RATE INDEX FOR PORTUGAL 3.1 NEERIP update Chart 1 COMPARISON BETWEEN NEERIP CALCULATED WITH FIXED WEIGHTS AND WITH TIME VARYING WEIGHTS Fxed weghts ( ) 97 Tme varyng weghts (prevous year) 95 Jan.99 Out.99 Oct.99 Jul.00 Apr.01 Abr.01 Jan.02 Oct.02 Out.02 Jul.03 Apr.04 Abr.04 The structure of the Portuguese external trade has undergone profound changes snce 1990, warrantng the need to update the NEERIP. As a consequence, the group of tradng partners consdered as well as the reference perod for the weghts were revsed. The weghts prevously used by Banco de Portugal were made avalable by the BIS, standardsed for the basket of the 13 currences consdered. In ths update, the calculaton was exclusvely made by Banco de Portugal. The seres of the new ndex starts n 1999, when the Thrd Stage of Economc and Monetary Unon also started, wth the adopton of the euro (see n Annex 1 the table wth the results). As referred to above, the group of countres relevant for the Portuguese external trade has changed over the past few years and therefore the prevous basket was outdated. For the new group of tradng partners, a wder group of 22 countres was chosen (Austra, Belgum, Brazl, Czech Republc, Denmark, Fnland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, The Netherlands, Norway, Poland, Span, Sweden, Swtzerland, Unted Kngdom and Unted States), takng nto account ther representatveness and avalablty of nformaton. Ths group of countres represents around 92 per cent of the Portuguese manufacturng external trade, and therefore t has a wder coverage than the prevous one, whch represented approxmately 82 per cent. The reference perod for the weghts was updated, correspondng to the average of the trennum. The opton to mantan fxed weghts to the detrment of tme varyng weghts makes the calculaton of NEERIP less complex and more stable. Ths opton does not seem to mply consderable dfferences as regards the alternatve opton. Chart 1 presents NEERIP (17) calculated wth fxed weghts and wth tme varyng weghts (18). As can be seen, dfferences are not sgnfcant and therefore the gan n terms of smplfcaton of the regular publcaton process of the seres justfes the choce. Moreover, as referred to above, the utlsaton of tme varyng weghts, even f correspondng to the prevous year, would mply that n the frst months of each year the structure of the ndex could not be updated. The weghts were calculated applyng the double weghtng method, usng the formula descrbed n Secton 2. It was assumed that Portugal competes n 23 markets: the 22 of the reference countres and a thrd market aggregatng the rest of the world. It was assumed that the producton of the rest of the world do not compete n any market consdered (19). The values of the trade flows between the several countres were obtaned on the World Trade Atlas (WTA) database. As the classfcaton of goods used by WTA s the Harmonsed Commodty Descrpton and Codng System (HS), t s not possble to extract drectly the value of external trade n manufacturng goods. Thus, t was necessary to convert ths nomenclature nto (17)All ndces presented take value 100 n the frst quarter of 1999, as the ECB does for the euro effectve exchange rates, makng comparsons easer. (18)The tme varyng weghts were calculated usng the same methodology as the fxed weghts, but consderng for each year the trade flows of the prevous year. (19)Ths smplfcaton s used by other nsttutons. See Turner, Phlp and Van t dack, Jozef (1993), p. 22 for the BIS and Buldorn, Luca, Makrydaks, Stelos and Thmann, Chrstan (2002), p. 12 for the ECB. Banco de Portugal / Economc bulletn / December

8 (20)The con table used was the one made avalable by the Unted Natons Organsaton (UNO), wth the 6-dgt HS. The con s somewhat complex and some SITC codes do not have correspondence n HS. (21)For a more detaled dscusson, see Turner, Phlp and Van t dack, Jozef (1993), pp (22)In the same crcumstances, the method appled by the ECB was smlar. See Buldorn, Luca, Makrydaks, Stelos and Thmann, Chrstan (2002), p. 15. (23)As referred to n footnote 12, ths standardsaton s not theoretcally correct. In practce, results are however qute smlar to those that would be obtaned by recalculatng the weghts. Per cent Table 2 PREVIOUS WEIGHTS AND UPDATED WEIGHTS weghts (1990) weghts ( ) Standardsed updated weghts ( ) (a) Austra Belgum (b) (b) Brazl Czech Republc Denmark Fnland France Germany (c) Greece Hungary Ireland Italy Japan Luxembourg The Netherlands Norway Poland Span Sweden Swtzerland Unted Kngdom USA Notes: (a) Standardsed updated weghts for the prevous basket of tradng partners. (b) The weght refers to Belgum and Luxembourg. (c) The weght refers only to West Germany. the Standard Internatonal Trade Classfcaton (SITC) (20), usng afterwards sectons 5 to 8. Data on Norway and Swtzerland were extracted from the Commodty Trade Statstcs Database of UNO. The domestc producton that competes wth mports had to be estmated (21). The procedure followed conssted n usng the adjusted value added of manufacturng (VAM), n order to be comparable wth gross trade flows. Data on VAM were obtaned through OECD (Natonal Accounts of OECD Countres Detaled Tables). As a measure of the nputs used by the domestc manufacturng ndustry other than the nputs produced by the ndustry tself, we added the value of manufacturng mports. Although ths s not the deal calculaton process, t avods negatve results. The calculaton of the domestc producton sold nternally was obtaned by subtractng manufacturng exports. However, as for some countres ths nformaton was not yet avalable for all years, we assumed n these cases that VAM vared n lne wth GDP (22). weghts show consderable dfferences compared wth the prevous ones. Table II shows the prevous weghts (base perod: 1990) and the updated weghts (base perod: ). Consderng that the reference tradng partners changed, t s necessary to standardse (23) the weghts of for the prevous basket so as to establsh comparsons. As llustrated n Chart 2, the countres that ncreased ther weght were Belgum and Luxembourg (+0.2 p.p.), Unted States (+1.7 p.p.) and chefly Span, wth a 10.7 p.p. ncrease. The countres wth the hghest absolute declnes were Italy, Unted Kngdom and France, recordng reductons of 1.9 p.p., 2.1 p.p. and 2.2 p.p. respectvely. In 1990 the three man tradng partners were by ths order, Germany, France and Span. In the perod Span was the most mportant tradng partner (23.4 per cent of the total for the 22 countres), followed by Germany and France. The weght of these three countres as a whole exceeds always 50 per cent. Despte the change observed n the structure of nternatonal trade, the performance of the new ndex s smlar to that of the prevous ndex n qualtatve terms, as llustrated n Chart 3. In part, ths performance can be explaned by the partal compensaton of the ncrease n the relatve weght of Span by the reducton n the relatve weght of other euro area countres. 3.2 Real effectve exchange rate ndex for Portugal As dscussed above, there are several possble deflators for the calculaton of REERIP. Wth ths update we decded to apply the CPI and GDP deflators, takng nto account the avalablty and relablty of the data. In the future, admttng that t wll be possble to have data on wages wth statstcally satsfactory qualty, namely for Portugal, we 70 Banco de Portugal / Economc bulletn / December 2004

9 Chart 2 COMPARISON BETWEEN WEIGHTS BASED ON 1990 AND STANDARDISED WEIGHTS BASED ON Belgum and Luxembourg Belgum and Danmark Chart 3 COMPARISON OF THE UPDATED AND PREVIOUS VERSIONS OF NEERIP prevous NEERIP weghts (1990) Standardsed updated weghts ( ) France Germany Italy updated NEERIP 95 Jan.99 Oct.99 Out.99 Jul.00 Abr.01 Apr.01 Jan.02 Out.02 Oct.02 Jul.03 Abr.04 Apr.04 are gong to construct also an (nfra-annual) ndex usng unt labour costs REERIP (adjusted for the consumer prce ndces) Japan Wth the am of obtanng a compettveness ndcator that makes t possble wthn a short tme and wth a monthly frequency, to understand recent developments n compettveness and takng nto account the relatvely generalsed use of consumer prce ndces, we constructed a NEERIP seres adjusted for ths type of ndcator (see Annex 2). The Netherlands Norway Span Sweden Swtzerland Unted Kngdom USA For EU countres and Norway we appled the monthly Harmonsed Index of Consumer Prces (HICP) compled by Eurostat and for the remanng countres we used the monthly CPI of the Reuters database. Chart 4 presents ths ndex, as well as the one resultng from the applcaton of the weghtngs structure of the prevous ndex. In real terms, dfferences n the evoluton of the updated ndex adjusted for the CPI vs-à-vs the prevous one are, n general, more sgnfcant than n nomnal terms. Ths result reflects the fact that ths ndex s more affected by the change n the structure of external trade, snce even the change n the relatve weght of the euro area tradng partners s relevant, n so far as these changes mply a dfferent weghtng of the natonal CPI. In ths case, the updated REERIP reflects a more favourable external compettveness poston than ndcated by the prevous REERIP, n partcular n the most recent years. In part, ths results from the ncrease n the relatve weght of Span, whch has recorded relatvely hgher nflaton levels than the ones of other mportant tradng partners. Even though, the trend of the chan rates and of the year-on-year rates n the new REERIP are relatvely smlar to those of the former REERIP REERIP (adjusted for GDP deflators) To supplement the NEERIP adjusted for the CPI, a quarterly ndex was constructed, adjusted for GDP deflators (see Annex 3). For ths, we compled (seasonally adjusted (24) ) GDP deflators, whch are regularly made avalable by Eurostat, but t was not possble to nclude all the countres consdered n the calculaton of the former ndex. The countres excluded were Brazl, Hungary, Luxembourg, Poland and Sweden (25).It should be noted, however, that on the whole these countres have a weght of approxmately 4 per cent n the orgnal structure of the weghts. (24)The choce of seasonally adjusted ndces was due to the fact that the GDP deflator n Portugal, n prncple, s only made avalable already dsseasonalsed, accordng to the methodology of the Quarterly Natonal Accounts. (25)To obtan weghts only for ths narrower group, the orgnal weghts were standardsed. Banco de Portugal / Economc bulletn / December

10 Chart 4 COMPARISON OF THE UPDATED AND PREVIOUS VERSIONS OF REERIP (ADJUSTED FOR THE CPI) 109 Chart 5 REAL EFFECTIVE EXCHANGE RATES INDICES FOR PORTUGAL prevous REERIP (CPI) updated REERIP (CPI) 101 REERIP (GDPD) REERIP (CPI) Jan.99 Oct.99 Out.99 Jul.00 Abr.01 Apr.01 Jan.02 Out.02 Oct.02 Jul.03 Abr.04 Apr Jan.99 Out.99 Oct.99 Jul.00 Abr.01 Apr.01 Jan.02 Oct.029 Out.02 Jul.03 Abr.04 Apr.04 Comparatvely wth the prevous case, these ndces have the dsadvantage of beng subject to regular revsons. Although typcally these revsons are not qute sgnfcant, they occur whenever data for a new quarter are released and therefore the correspondng REERIP must also be changed. The REERIP results adjusted for the GDP deflators and for the CPI are not fully smlar (Chart 5) but pont, n general, to the same type of compettve developments. In 1999 and 2000 the compettveness of the Portuguese economy seems to have remaned relatvely stable, pontng even to a slght mprovement. From 2001 onwards, REERIP recorded an upward trend, wth some losses n compettveness, n partcular n 2002 and n the frst half of Thenceforth, the deteroraton of compettveness was nterrupted, gvng rse to a stablsaton of the ndex. 4. CONCLUSION The performance of the updated NEERIP, despte the szable change n the structure of Portugal s nternatonal trade, s smlar to that of the prevous ndex. However, n real terms, dfferences are more sgnfcant. In ths case, the new REERIP has, n general, a lower level than the prevous ndex, denotng a relatvely more favourable compettve stuaton. Both ths ndex and the real ndex whch s obtaned wth the utlsaton of GDP deflators, ndcate that from 2001 onwards the Portuguese economy has lost some compettveness. Notwthstandng, from the second half of 2003 onwards, the stuaton seems to have stablsed. However, t should be noted that these consderatons must be taken wth cauton snce as referred to above, these ndces are not a global measure of compettveness, gven that they gnore some qualtatve aspects that may nfluence t. REFERENCES European Central Bank, 2004, Update of the overall trade weghts for the effectve exchange rates of the euro and computaton of a new set of euro ndcators, Monthly Bulletn of the ECB, September, pp ; Banca d Itala, 1998, Nuov ndcator d tasso d cambo effettvo nomnale and reale, Bollettno Economco no Note, February; Bayoum, T., Jaewoo, L. and Jayanth, S., 2004, New rates for new weghts, IMF Workng Paper, pendng publcaton; Buldorn, Luca, Makrydaks, Stelos and Thmann, Chrstan, 2002, The effectve exchange rates of the euro, Occasonal Paper Seres no. 2, European Central Bank, February; Leahy, Mchael, 1998, New summary measures of the foregn exchange value of the dollar, 72 Banco de Portugal / Economc bulletn / December 2004

11 Federal Reserve Bulletn, October, pp ; Lynch, Brone and Whtaker, Smon, 2004, The new sterlng ERI, Bank of England Quarterly Bulletn, wnter 2004; Turner, Phlp and Van t dack, Jozef, 1993, Measurng nternatonal prce and cost compettveness, BIS Economc Papers no. 39, November; Vdal, Mara José and Balcão Res, Teresa, 1994, Índce da taxa de câmbo efectva do escudo: Estudo dos ponderadores do comérco externo e apresentação da nova metodologa, Quarterly Bulletn of Banco de Portugal, June; Zanello, Alessandro and Desruelle, Domnque, 1997, A prmer on the IMF s Informaton Notce System, IMF Workng Paper WP/97/71, May. Banco de Portugal / Economc bulletn / December

12 Annex 1 COMPARISON OF THE UPDATED AND PREVIOUS VERSIONS OF NEERIP - cont. (In percentage) NEERIP Chan rate Year-on-year rate Annual average rate 1999Q1=100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Banco de Portugal / Economc bulletn / December 2004

13 COMPARISON OF THE UPDATED AND PREVIOUS VERSIONS OF NEERIP (In percentage) NEERIP Chan rate Year-on-year rate Annual average rate 1999Q1=100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Banco de Portugal / Economc bulletn / December

14 Annex 2 (In percentage) COMPARISON OF THE UPDATED AND PREVIOUS VERSIONS OF REERIP (CPI) - cont. REERIP (CPI) Chan rate Year-on-year rate Annual average rate 1999Q1=100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Banco de Portugal / Economc bulletn / December 2004

15 COMPARISON OF THE UPDATED AND PREVIOUS VERSIONS OF REERIP (CPI) (In percentage) REERIP (CPI) Chan rate Year-on-year rate Annual average rate 1999Q1=100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Feb Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Banco de Portugal / Economc bulletn / December

16 Annex 3 (In percentage) COMPARISON OF THE REAL EFFECTIVE EXCHANGE RATES INDICES FOR PORTUGAL, ADJUSTED FOR THE CPI AND GDP DEFLATORS REERIP (CPI) REERIP (GDPD) Chan rate Year-on-year rate Annual average rate 1999Q1=100 REERIP (CPI) REERIP (GDPD) REERIP (CPI) REERIP (GDPD) REERIP (CPI) REERIP (GDPD) 1999Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Banco de Portugal / Economc bulletn / December 2004