The Portuguese real exchange rate, 1995-2010 : competitiveness or price effects?

Abstract

We disentangle the extent to which the real exchange rate appreciation in Por- tugal during 1995-2010 re ected the emergence of wage-productivity misalignments or, instead, changes in the relative price of tradable and non-tradable goods. The available data suggests that the latter e ect dominated at the aggregate level. The evidence is consistent with the view that the external imbalance that character- ized the Portuguese economy during the 1990s and early 2000s was triggered by the liberalization of capital ows, and not by dysfunctional wage setting institu- tions. Using the Fundamental Equilibrium Exchange Rate approach, we nd that recent oil price shocks played an important role in explaining the real exchange rate overvaluation in Portugal.