Republic of Estonia: Selected Issues
IMF Staff Country Reports, January 22, 2020
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- Published: January 22, 2020
- Series: IMF Staff Country Reports
Integration of Global Value Chains (GVCs) into Competitiveness Analysis
- Standard real effective exchange rate (REER) indexes assume trade is only in final goods.
- Estonia is highly integrated into GVCs, like most European economies.
- Competitiveness assessments should consider trade in value added rather than only gross trade flows.
- The paper uses a structural model to assess competitiveness and exposure to trade shocks accounting for GVC participation in Estonia.
Findings on REER and Competitiveness
- An analysis using a REER index that considers the GVC architecture suggests potential competitiveness problems in Estonia.
- Standard REER measures that ignore GVCs can misstate competitiveness for an economy with deep GVC integration.
Estimated Impacts on Value Added Exports and Real GDP
- The paper estimates the impact of overvaluation (and appreciation) of the GVC-related REER measure on value added export and real GDP growth and finds observable effects.
- Trade-tension-induced tariff hikes may have important costs for value added produced in Estonia.
Policy Implications and Risk Considerations
- Competitiveness monitoring and policy design should incorporate GVC-aware indicators (trade in value added and GVC-informed REER measures).
- Policies that ignore GVC linkages risk understating exposure to exchange rate movements and tariff shocks.
- Addressing potential REER overvaluation (in GVC terms) is relevant for sustaining value added exports and real GDP growth.
IMF Staff Country Report, "Republic of Estonia: Selected Issues", January 22, 2020
Content in this bundle
- Republic of Estonia: Selected Issues; IMF Country Report No. 20/13; January 2, 2020