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Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach

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  • Francisco Maeso-Fernandez
  • Chiara Osbat
  • Bernd Schnatz

Abstract

This paper presents an empirical analysis of the medium-term determinants of the euro effective exchange rate. The empirical analysis builds on synthetic quarterly data from 1975 to 1998, and derives a Behavioural Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). Four different specifications are retained, due to the difficulties encountered in specifying an encompassing model. The results indicate that differentials in real interest rates and productivity, and (in some specifications) the relative fiscal stance and the real price of oil, have a significant influence on the euro effective exchange rate. Assessing the existence and the extent of the over- or undervaluation of the exchange rate is not straightforward, since these different specifications often lead to contrasting findings. However, all four specifications point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen. Copyright Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia 2002.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Australian Economic Papers.

Volume (Year): 41 (2002)
Issue (Month): 4 (December)
Pages: 437-461

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Handle: RePEc:bla:ausecp:v:41:y:2002:i:4:p:437-461

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  1. Gropp, Reint & Kostial, Kristina, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series 0031, European Central Bank.
  2. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  3. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
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