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Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework

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Author Info
Enrique Alberola
Susana G. Cervero
Humberto Lopez
Angel Ubide (International Monetary Fund)

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Abstract

This paper presents a methodology for the calculation of bilateral equilibrium exchange rates for a panel of currencies in a way that guarantees consistency at the global level. A theoretical model, which encompasses the balance of payments and the Balassa-Samuelson approaches to real exchange rate determination, shows that the stock of net foreign assets and the evolution of sectoral prices are the fundamentals underlying the behavior of the real exchange rate. An unobserved components methodology in a cointegration framework allows us to identify a time-varying equilibrium real exchange rate, and deviations from this equilibrium provide an estimate of the degree of multilateral misalignment. Finally, an algebraic transformation converts these multilateral equilibrium real rates into bilateral equilibrium nominal rates. The results uncover, inter alia, that by the start of Stage III of EMU the euro was significantly undervalued against the dollar and even more against the pound, but overvalued relative to the yen. Regarding EMU currencies, it is shown that the four major EMU currencies locked their parities with the euro at a rate close to equilibrium.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0051.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0051

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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. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1996. "Relative Labour Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," CEPR Discussion Papers 1464, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Pierse, R. G. & Snell, A. J., 1995. "Temporal aggregation and the power of tests for a unit root," Journal of Econometrics, Elsevier, vol. 65(2), pages 333-345, February. [Downloadable!] (restricted)
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  8. Maravall, Agustin, 1993. "Stochastic linear trends : Models and estimators," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 5-37, March. [Downloadable!] (restricted)
  9. Enrique Alberola & Humberto López, 2001. "Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta," Spanish Economic Review, Springer, vol. 3(1), pages 23-40. [Downloadable!] (restricted)
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  10. Rudiger Dornbusch, 1985. "Purchasing Power Parity," NBER Working Papers 1591, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Enrique Alberola & Humberto López, 1999. "Internal and External Exchange Rate Equilibrium in a Cointegration Framework. An Application to the Spanish Peseta," Banco de España Working Papers 9916, Banco de España.
  14. Bernard, Andrew B & Jones, Charles I, 1996. "Comparing Apples to Oranges: Productivity Convergence and Measurement across Industries and Countries," American Economic Review, American Economic Association, vol. 86(5), pages 1216-38, December. [Downloadable!] (restricted)
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  16. Salim M. Darbar & Parha Deb, 1999. "Linkages Among Asset Markets in the United States - Tests in a Bivariate GARCH Framework," IMF Working Papers 99/158, International Monetary Fund.
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  18. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February. [Downloadable!] (restricted)
  19. Quah, Danny, 1992. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Econometrica, Econometric Society, vol. 60(1), pages 107-18, January. [Downloadable!] (restricted)
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  20. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June. [Downloadable!] (restricted)
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  21. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate - A Stock-Flow Perspective," IMF Working Papers 94/90, International Monetary Fund.
  22. Joseph E. Gagnon, 1996. "Net foreign assets and equilibrium exchange rates: panel evidence," International Finance Discussion Papers 574, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  24. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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