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Model uncertainty and the equilibrium value of the real effective euro exchange rate

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Author Info
Carsten Detken () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Alistair Dieppe () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Jerome Henry () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Frank Smets () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Carmen Marin (Universidad de Murcia, 30071 Murcia, Spain.)

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Abstract

On the basis of historical data aggregated over the period 1973 to 2000, we estimated four different equilibrium exchange rate models for the synthetic euro. Using the same data set, variable definitions and sample period offers the possibility to assess the uncertainty surrounding such equilibrium levels, both from a statistical and a theoretical perspective. We employed reduced form co-integration models, a structural VAR, a Natrex model (estimated in structural form) and the ECB's small-sized euro area wide macro-economic model. In this order the approaches feature an increasing degree of "structure," in the sense of the constraints based on economic theory embedded in the econometric models that were estimated. The results confirm the high likelihood for the euro having been undervalued in Q4 2000, while stressing the significant empirical and theoretical uncertainty with respect to the equilibrium exchange rate level. JEL Classification: F31; F32.

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Paper provided by European Central Bank in its series Working Paper Series with number 160.

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Length: 52 pages
Date of creation: Jul 2002
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Handle: RePEc:ecb:ecbwps:20020160

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Keywords: Equilibrium exchange rate; euro; model uncertainty.;

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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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Full references

Cited by:
(explanations, 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.)

  1. Katie Farrant & Gert Peersman, . "Accounting for the source of exchange rate movements: new evidence," Bank of England working papers 269, Bank of England. [Downloadable!]
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  15. Carmen Mar? Mart?ez, 2003. "The Structural Approach of a Natrex Model on Equilibrium Exchange Rates," UFAE and IAE Working Papers 588.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
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  19. K. Farrant & G. Peersman, 2005. "Is the exchange rate a shock absorber or a source of shocks? New empirical evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/285, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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