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Revisiting the effective exchange rates of the euro

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  • Schmitz, Martin
  • De Clercq, Maarten
  • Fidora, Michael
  • Lauro, Bernadette
  • Pinheiro, Cristina

Abstract

This paper describes in detail the methodology currently used by the European Central Bank (ECB) to determine the nominal and real effective exchange rate indices of the euro. Building on the work of Buldorini et al. (2002), it shows how the ECB’s techniques for calculating effective exchange rates have been updated over time and explains the related theoretical foundations. In particular, the paper discusses the use and development of trade weights based on trade in manufactured goods (taking account of third market effects), the trading partners selected, and the choice of deflators for constructing the real effective exchange rate indices. In addition, it presents evidence on exchange rate and competitiveness developments for both the euro area as a whole and individual Member States. While the growing importance of China is reflected in the updated trade weights of euro effective exchange rates, it appears that the increasing integration of the euro area with other European economies accounts for the largest variation in trade weights. The US dollar, an anchor currency for a number of large emerging markets, continues to play an important role for the effective exchange rate of the euro and euro area competitiveness. Overall, euro area competitiveness has improved slightly since the introduction of the single currency, despite significant heterogeneity within the euro area. JEL Classification: C43, D12, E31

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Bibliographic Info

Paper provided by European Central Bank in its series Occasional Paper Series with number 134.

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Date of creation: Jun 2012
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Handle: RePEc:ecb:ecbops:20120134

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Keywords: competitiveness; EER; HCI; NEER; REER; trade weights;

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Cited by:
  1. Paulo Soares Esteves & António Rua, 2013. "Is there a role for domestic demand pressure on export performance?," Working Papers, Banco de Portugal, Economics and Research Department w201303, Banco de Portugal, Economics and Research Department.
  2. A team of the Working Group on Econometric Modelling of the European System of Central Banks, 2012. "Competitiveness and external imbalances within the euro area," Occasional Paper Series, European Central Bank 139, European Central Bank.
  3. Bernadette Lauro & Martin Schmitz, 2013. "Euro area exchange rate-based competitiveness indicators: a comparison of methodologies and empirical results," IFC Bulletins chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Proceedings of the Sixth IFC Conference on "Statistical issues and activities in a changing environment", Basel, 28-29 August 2012., volume 36, pages 325-339 Bank for International Settlements.
  4. Rudolfs Bems & Robert C. Johnson, 2012. "Value-Added Exchange Rates," NBER Working Papers 18498, National Bureau of Economic Research, Inc.
  5. Gelman, Maria & Jochem, Axel & Reitz, Stefan, 2013. "Real financial market exchange rates and capital flows," Discussion Papers, Deutsche Bundesbank, Research Centre 50/2013, Deutsche Bundesbank, Research Centre.
  6. Benkovskis , Konstantins & Wörz , Julia, 2013. "What drives the market share changes? Price versus non-price factors," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 18/2013, Bank of Finland, Institute for Economies in Transition.
  7. Walpurga Köhler-Töglhofer & Christa Magerl, 2013. "Revision of Price/Cost Competitiveness Indicators for Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 93–119.
  8. Fischer, Christoph & Hossfeld, Oliver, 2014. "A consistent set of multilateral productivity approach-based indicators of price competitiveness," Discussion Papers, Deutsche Bundesbank, Research Centre 10/2014, Deutsche Bundesbank, Research Centre.
  9. Soares Esteves, Paulo & Rua, António, 2013. "Is there a role for domestic demand pressure on export performance?," Working Paper Series, European Central Bank 1594, European Central Bank.
  10. Campbell, Douglas L & Pyun, Ju Hyun, 2014. "Through the Looking Glass: A WARPed View of Real Exchange Rate History," MPRA Paper 55870, University Library of Munich, Germany.

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