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Endogenous Growth in an Open Economy and the Real Exchange Rate

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  • Daniela Federici
  • Giancarlo Gandolfo

Abstract

This paper is a step in the direction of a larger research project aimed at determining the long run equilibrium value of the euro/dollar real exchange rate. Given this value, one could then give a precise meaning to the notion of undervaluation or overvaluation of the euro, and calculate its misalignment. The problem however arises of how to assess the reliability of such misalignment calculations. In our opinion, we must have a benchmark (namely a period in which we exactly know from outside sources the misalignment itself), against which we can test the validity of the model underlying our calculations. This of course is not (yet) possible for the euro, so that all the calculations of the misalignment of the euro that have been made can only be compared with one another, without knowing which is the good one. Hence, before building a model to be applied to the euro/dollar, we tested our ideas incorporating them in a basic model to be applied to the lira/dollar in a period in which we do exactly know the actual misalignment of the lira from outside sources.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 526.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_526

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Keywords: NATREX; equilibrium exchange rates; international capital flows; misalignment;

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References

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  1. Infante, Ettore F & Stein, Jerome L, 1973. "Optimal Growth with Robust Feedback Control," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 47-60, January.
  2. Jerome L. Stein & Giovanna Paladino, 1999. "Exchange Rate Misalignments and Crises," CESifo Working Paper Series 205, CESifo Group Munich.
  3. Peter Nijkamp & Jacques Poot, 1998. "original: Spatial perspectives on new theories of economic growth," The Annals of Regional Science, Springer, vol. 32(1), pages 7-37.
  4. Frank Hahn & Robert Solow, 1997. "A Critical Essay on Modern Macroeconomic Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258154x, December.
  5. Mansoorian, Arman, 1993. "Habit persistence and the Harberger-Laursen-Metzler effect in an infinite horizon model," Journal of International Economics, Elsevier, vol. 34(1-2), pages 153-166, February.
  6. Wickens, Michael, 1995. "Real Business Cycle Analysis: A Needed Revolution in Macroeconometrics," Economic Journal, Royal Economic Society, vol. 105(433), pages 1637-48, November.
  7. Quah, Danny, 1990. "Permanent and Transitory Movements in Labor Income: An Explanation for "Excess Smoothness" in Consumption," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 449-75, June.
  8. Bergstrom, A.R., 1984. "Continuous time stochastic models and issues of aggregation over time," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 20, pages 1145-1212 Elsevier.
  9. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  11. Michael P. Dooley & Peter Isard, 1979. "The portfolio-balance model of exchange rates," International Finance Discussion Papers 141, Board of Governors of the Federal Reserve System (U.S.).
  12. Stein, Jerome L., 1990. "The real exchange rate," Journal of Banking & Finance, Elsevier, vol. 14(5), pages 1045-1078, November.
  13. Gandolfo, Giancarlo & Padoan, Pietro Carlo, 1990. "The Italian continuous time model : Theory and empirical results," Economic Modelling, Elsevier, vol. 7(2), pages 91-132, April.
  14. Hooper, Peter & Morton, John, 1982. "Fluctuations in the dollar: A model of nominal and real exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 39-56, January.
  15. Wymer, C R, 1972. "Econometric Estimation of Stochastic Differential Equation Systems," Econometrica, Econometric Society, vol. 40(3), pages 565-77, May.
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Cited by:
  1. Siregar, Reza, 2011. "The Concepts of Equilibrium Exchange Rate: A Survey of Literature," MPRA Paper 28987, University Library of Munich, Germany.
  2. Przystupa, Jan, 2009. "Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone," MPRA Paper 19549, University Library of Munich, Germany.

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