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Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta

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  • Enrique Alberola

    ()
    (Bank of Spain, Alcalá 50, 28012 Madrid, Spain World Bank, 1818 W Street NW, Washington DC 20433, USA)

  • Humberto López

    ()
    (Bank of Spain, Alcalá 50, 28012 Madrid, Spain World Bank, 1818 W Street NW, Washington DC 20433, USA)

Abstract

A 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 Info

Article provided by Springer in its journal Spanish Economic Review.

Volume (Year): 3 (2001)
Issue (Month): 1 ()
Pages: 23-40

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Handle: RePEc:spr:specre:v:3:y:2001:i:1:p:23-40

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Keywords: Equilibrium exchange rates; cointegration; Balassa-Samuelson; current account;

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Cited by:
  1. Alberola, Enrique & Lopez, Humberto & Serven, Luis, 2004. "Tango with the Gringo: the hard peg and real misalignment in Argentina," Policy Research Working Paper Series 3322, The World Bank.
  2. César Calderón M., 2004. "Un Análisis del Comportamiento del Tipo de Cambio Real en Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 7(1), pages 5-30, April.
  3. Megumi Kubota, . "Real Exchange Rate Misalignments: Theoretical Modelling and Empirical Evidence," Discussion Papers 09/24, Department of Economics, University of York.
  4. Lopez, Humberto & Molina, Luis & Bussolo, Maurizio, 2007. "Remittances and the real exchange rate," Policy Research Working Paper Series 4213, The World Bank.
  5. Enrique Alberola & Susana G. Cervero & Humberto Lopez & Angel Ubide, 2000. "Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework," Econometric Society World Congress 2000 Contributed Papers 0051, Econometric Society.
  6. Alper, Ahmet Murat & Civcir, İrfan, 2012. "Can overvaluation prelude to crisis and harm growth in Turkey," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 112-131.
  7. Elena Pelinescu, 2013. "Exchange Rate During The Financial Crisis," Internal Auditing and Risk Management, Athenaeum University of Bucharest, vol. 2(30), pages 101-110, June.
  8. Kubota, Megumi, 2013. "Estimating the half-life of theoretically founded real exchange rate misalignments," Policy Research Working Paper Series 6411, The World Bank.
  9. Hugo Oliveros & Carlos Huertas, . "Desequilibrios Nominales y Reales del Tipo de Cambio en Colombia," Borradores de Economia 220, Banco de la Republica de Colombia.

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