Premium
A Stochastic Measure of International Competitiveness *
Author(s) -
CLEMENTS KENNETH W.,
IZAN H. Y.,
LAN YIHUI
Publication year - 2009
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2009.01085.x
Subject(s) - measure (data warehouse) , exchange rate , volatility (finance) , component (thermodynamics) , econometrics , economics , computer science , monetary economics , data mining , physics , thermodynamics
Government agencies produce indexes that purport to measure international competitiveness. The most common version is the real effective exchange rate, which is some form of weighted average of the real exchange rates of the country's trading partners. Such indexes convey a false sense of accuracy as they ignore the volatility among the component real exchange rates of the partners. As long as all real rates do not move in an equiproportionate fashion, in a fundamental sense real effective exchange rates are subject to estimation uncertainty. We demonstrate how this uncertainty can be measured and used to enhance current practice.