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

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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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Bibliographic Info

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
Date of revision:
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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  1. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
  2. Reint Gropp & Kristina Kostial, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series 31, European Central Bank.
  3. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
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