Competitiveness and the Equilibrium Exchange Rate in Costa Rica

IMF Working Papers, February 1, 2001

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Competitiveness and the Equilibrium Exchange Rate in Costa Rica

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Bibliographic details

• Authors: Claudio A Paiva
• Published: February 1, 2001
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451844047.001

Summary

• This paper evaluates several indicators of external vulnerability and estimates the equilibrium real exchange rate for Costa Rica.
• While current indicators are mostly positive, declining market shares of domestic exports, the expected decline in foreign direct investment, and the desirability of strengthening the reserve position recommend an improvement in the current account.
• Costa Rica’s equilibrium real exchange rate is estimated using the CGER and the FEER methodologies.
• Overall conclusion: there are no signs of serious external vulnerability, but the real exchange rate appears to be somewhat overvalued; this situation would be best addressed through increased fiscal discipline.

Major findings on external vulnerability and competitiveness

• Current indicators: mostly positive.
• Risks and concerns:
  • Declining market shares of domestic exports.
  • Expected decline in foreign direct investment (FDI inflow).
  • Need to strengthen the reserve position.
• Policy implication from indicators: improvement in the current account is recommended.

Equilibrium real exchange rate estimation

• Methodologies used:
  • CGER (Consultative Group on Exchange Rates) methodology.
  • FEER (Fundamental Equilibrium Exchange Rate) methodology.
• Resulting assessment: the real exchange rate appears to be somewhat overvalued according to the estimations.

Policy recommendations

• Primary recommendation: increased fiscal discipline to address the overvaluation of the real exchange rate.
• Additional implied policy objective: improve the current account to mitigate vulnerability from declining export market shares and expected lower FDI.

Publication and metadata

• Author: Claudio A Paiva
• Date: February 1, 2001
• Series: Working Paper No. 2001/023
• Issue: 023
• Volume: 2001
• Pages: 29
• DOI: https://doi.org/10.5089/9781451844047.001
• Stock No: WPIEA0232001
• ISBN: 9781451844047
• ISSN: 1018-5941
• Subjects: Balance of payments; Current account; Current account deficits; Exchange rates; External debt; Foreign exchange; Real exchange rates
• Keywords: central bank of Costa Rica; competitiveness; Costa Rica colón; Current account; Current account deficits; current account sustainability; current account upturn; Equilibrium exchange rate; equilibrium real effective exchange rate; exchange rate; exchange rate movement; Exchange rates; export base; external vulnerability; FDI inflow; GDP; Real exchange rates; WP
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Source: "Competitiveness and the Equilibrium Exchange Rate in Costa Rica", Claudio A Paiva, IMF Working Papers 2001, 023 (February 1, 2001).

Content in this bundle

• Competitivenes and the Equilibrium Exchange Rate in Costa Rica - WP/01/23
  • Competitivenes and the Equilibrium Exchange Rate in Costa Rica - WP/01/23 (Markdown version)
  • Competitivenes and the Equilibrium Exchange Rate in Costa Rica - WP/01/23 (PDF)