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

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  • Detken, Carsten
  • Dieppe, Alistair
  • Henry, Jérôme
  • Marin, Carmen
  • Smets, Frank

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 structurla 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 leikelihood for the euro ahving 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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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0160.

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Date of creation: Jul 2002
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Handle: RePEc:ecb:ecbwps:20020160

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  1. Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2001. "Determinants of the euro real effective exchange rate: a BEER/PEER approach," International Finance 0111003, EconWPA.
  2. Olivier Jean Blanchard & Danny Quah, 1990. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  3. Patrick K. Asea & Enrique G. Mendoza, 1994. "Do Long-Run Productivity Differentials Explain Long-Run Real Exchange Rates?," IMF Working Papers 94/60, International Monetary Fund.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  5. John H. Rogers, 1998. "Monetary shocks and real exchange rates," International Finance Discussion Papers 612, Board of Governors of the Federal Reserve System (U.S.).
  6. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities between the G3 Economies," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 548-583, December.
  7. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
  8. Hsieh, David A., 1982. "The determination of the real exchange rate : The productivity approach," Journal of International Economics, Elsevier, vol. 12(3-4), pages 355-362, May.
  9. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities Between the G3-Economies," Discussion Paper Serie B 419, University of Bonn, Germany.
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