Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta
AbstractA simple cointegration methodology is used to compute the equilibrium real exchange rate for the peseta. The stock of foreign assets and the evolution of sectoral prices are considered to be the fundamentals for the real exchange rate. After testing for cointegration, we proceed to decompose the series into a permanent and a transitory component, following the method devised by Gonzalo and Granger. The permanent component of the real exchange rate corresponds to its (time-varying) equilibrium value, and the deviation of the actual real exchange rate from this equilibrium value gives an estimation of the degree of misalignment of the real exchange rate. By the end of the sample (1998:1), the peseta is estimated to be undervalued around 6%.
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Bibliographic InfoArticle provided by Springer in its journal Spanish Economic Review.
Volume (Year): 3 (2001)
Issue (Month): 1 ()
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Other versions of this item:
- Enrique Alberola & Humberto López, 1999. "Internal and External Exchange Rate Equilibrium in a Cointegration Framework. An Application to the Spanish Peseta," Banco de Espaï¿½a Working Papers 9916, Banco de Espa�a.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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- Alberola, Enrique & Lopez, Humberto & Serven, Luis, 2004.
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