Mapping a country's competitive position: a real exchange rate approach

J. Zambujal‐Oliveira (Department of Engineering and Management (DEG), Centre for Management Studies (CEG‐IST), Instituto Superior Técnico (IST), Technical University of Lisbon (UTL), Lisbon, Portugal)
Miguel Faria e Castro (Faculty of Economics, New University of Lisbon (UNL), Lisbon, Portugal)

Studies in Economics and Finance

ISSN: 1086-7376

Publication date: 2 August 2011

Abstract

Purpose

The observed real exchange rate, measured as an effective index of real labour costs, may serve as a base for the evaluation of the Portuguese economy's competitiveness. The purpose of this paper is to evaluate the positioning of the real exchange rate, throughout time, against a benchmark that guarantees external macroeconomic equilibrium (balanced fundamental account).

Design/methodology/approach

This paper uses the effective real exchange rate as an indicator of Portugal's competitive position in relation to its major trading partners (fundamental equilibrium exchange rate approach using the unit labour costs).

Findings

The authors found evidence that the real exchange rate has been persistently overvalued since the early 1990s. The evolution of this situation, which is harmful for the national economy, does not evidence the return to a path that may ensure external equilibrium for Portugal. The results show evidence of significant overvaluation of the Portuguese real exchange rate when compared to its estimated equilibrium level. In order to achieve a balanced fundamental account and considering a margin of error of 5 per cent, the real exchange rate needs to depreciate between 27.69 and 30.61 per cent.

Originality/value

The relevance of the real effective exchange rate as a macroeconomic indicator arises from its role as a measure of national competitiveness. Computed as a measure of the difference of international prices, adjusted to the same unit of measurement, it represents the relative price of goods between countries, determining where this same price may be higher or lower. According to Krugman and Obstfeld, the manipulation of the real effective exchange rate allows one country to adjust its level of competitiveness against its trading partners.

Keywords

Citation

Zambujal‐Oliveira, J. and Faria e Castro, M. (2011), "Mapping a country's competitive position: a real exchange rate approach", Studies in Economics and Finance, Vol. 28 No. 3, pp. 233-244. https://doi.org/10.1108/10867371111141981

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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