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Determinants of the Euro real effective exchange rate: a BEER/PEER approach

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Author Info
Francisco Maeso Fernandez () (Universidad de Murcia - Department of Applied Economics, 3010 Murcia, Spain.)
Bernd Schnatz () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Chiara Osbat () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)

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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 model specifications are retained, due to the difficulties encountered in specifying an encompassing model. 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 models point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen. JEL Classification: F31; F32.

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Paper provided by European Central Bank in its series Working Paper Series with number 085.

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Length: 48 pages
Date of creation: Nov 2001
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Handle: RePEc:ecb:ecbwps:20010085

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Related research
Keywords: euro equilibrium exchange rates cointegration analysis Gonzalo-Granger decomposition fundamentals BEER PEER.

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  8. Kakkar, Vikas & Ogaki, Masao, 1999. "Real exchange rates and nontradables: A relative price approach," Journal of Empirical Finance, Elsevier, vol. 6(2), pages 193-215, April. [Downloadable!] (restricted)
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  12. Ronald MacDonald, 1995. "Long-Run Exchange Rate Modeling - A Survey of the Recent Evidence," IMF Working Papers 95/14, International Monetary Fund.
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  17. Peter B. Clark & Ronald MacDonald, 2000. "Filtering the BEER - A Permanent and Transitory Decomposition," IMF Working Papers 00/144, International Monetary Fund.
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  1. Koedijk, C.G. & Tims, B. & Dijk, M.A. van, 2004. "Purchasing Power Parity and the Euro Area," Research Paper ERS-2004-025-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  2. Chernookiy Valery, 2005. "Adjustment to the Asymmetric Shocks and Currency Unions: the Case of Belarus and Russia," EERC Working Paper Series 05-07e, EERC Research Network, Russia and CIS. [Downloadable!]
  3. Michael Funke & Jörg Rahn, 2005. "Just how Undervalued is the Chinese Renminbi," Quantitative Macroeconomics Working Papers 20504, Hamburg University, Department of Economics. [Downloadable!]
    Other versions:
  4. Jörg Rahn, 2004. "Bilaterial equilibrium exchange rates of EU accession countries against the euro," Macroeconomics 0401010, EconWPA. [Downloadable!]
  5. Michael Funke & Jorg Rahn, 2004. "By How Much Is The Chinese Renminbi Undervalued?," Money Macro and Finance (MMF) Research Group Conference 2004 40, Money Macro and Finance Research Group. [Downloadable!]
  6. Alyson Bloomer & Thierry Warin, 2007. "A Note on the ECB's Monetary Policy when Confronted with International Systemic Risks," Global Economy Journal, International Trade and Finance Association, vol. 5(1), pages 6. [Downloadable!]
  7. Antonia López Villavicencio & Josep Lluís Raymond Bara, 2006. "The short and long-run determinants of the real exchange rate in Mexico," Working Papers wpdea0606, Department of Applied Economics at Universitat Autonoma of Barcelona. [Downloadable!]
  8. Rebeca Jiménez-Rodríguez & Marcelo Sánchez, 2004. "Oil price shocks and real GDP growth: empirical evidence for some OECD countries," Working Paper Series 362, European Central Bank. [Downloadable!]
  9. Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia-Pascual, 2003. "What Do We Know about Recent Exchange Rate Models? In-Sample Fit and Out-of-Sample Performance Evaluated," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  10. Mariam Camarero & Javier Ordóñez & Cecilio Tamarit, 2002. "The Euro-Dollar exchange rate: Is it fundamental?," European Economy Group Working Papers 16, European Economy Group. [Downloadable!]
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  11. Yin-Wong Cheung & Menzie Chinn & Antonio Garcia Pascual, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series 1033, Department of Economics, UC Santa Cruz. [Downloadable!]
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  12. Nikolaos Giannellis & Athanasios Papadopoulos, 2005. "Estimating the Equilibrium Effective Exchange Rate for Potential EMU members," Working Papers 0719, University of Crete, Department of Economics, revised 08 Mar 2007. [Downloadable!]
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  13. Jörg Rahn, 2003. "Bilateral Equilibrium Exchange Rates of the EU Accession Countries against the Euro," Quantitative Macroeconomics Working Papers 20306, Hamburg University, Department of Economics. [Downloadable!]
  14. Claudio Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 06/221, International Monetary Fund. [Downloadable!]
  15. Rebeca Jiménez-Rodríguez & Marcelo Sánchez, 2005. "Oil price shocks and real GDP growth: empirical evidence for some OECD countries," Applied Economics, Taylor and Francis Journals, vol. 37(2), pages 201-228, February. [Downloadable!] (restricted)
  16. Balázs Égert, 2002. "Equilibrium Real Exchange Rates in Central Europe's Transition Economies: Knocking on Heaven's Door," William Davidson Institute Working Papers Series 480, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  17. Carsten Detken & Alistair Dieppe & Jerome Henry & Frank Smets & Carmen Marin, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 160, European Central Bank. [Downloadable!]
  18. Rahn, Jörg, 2003. "Bilaterial equilibrium exchange rates of EU accession countries against the euro," BOFIT Discussion Papers 11/2003, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  19. Katerina Smidkova & Ales Bulir, 2004. "Would Fast Sailing Towards the Euro Be Smooth?: What Fundamental Real Exchange Rates Tell Us About Acceding Economies," Macroeconomics 0408002, EconWPA. [Downloadable!]
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