Measuring Malta's international price competitiveness in the manufacturing and tourism sectors through the effective exchange rate indices

Abstract

International competitiveness Is crucial for an open economy such as Malta's. Specifically, developments in the bilateral exchange rates and relative prices are expected to affect the international price competitiveness of the Maltese economy. This dissertation seeks to assess Malta's international price competitiveness via the construction of Effective Exchange Rate Indices, thereby updating the latest disaggregated Effective Exchange Rates calculated for Malta by the Central bank of Malta in 1996. The Effective Exchange Rates are constructed using a trade-based double-weighted system in an attempt to capture price competitiveness in relation not only to Malta's trading partners but also in relation to "third countries" that trade with Malta's trading partners. Due to space and time constraints, the computation of the Effective Exchange Rates was limited to two very important sectors of the Maltese economy, namely the tourism and manufacturing sectors. Results indicate that between 1996 and 2009 Malta might have experienced a worsening of its international price competitiveness due to currency appreciation as well as due to relative price increases.