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The Euro-Dollar exchange rate: Is it fundamental?

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Author Info
Mariam Camarero
Javier Ordóñez
Cecilio Tamarit

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Abstract

In this paper we have applied two different but complementary techniques and approaches to the study of the evolution of the dollar real exchange rate in relation with the Euro-area currencies. First, using the panel cointegration methodology for both homogeneous and heterogeneous panels, we study the long-run relationship between the bilateral real exchange rate of the dollar versus 10 European countries, Canada and Japan. Second, in a time series framework, we use Euro-area aggregate or "synthetic" variables to study the behavior of the dollar/Euro real exchange rate. The selected specification obtained using the panel techniques is an eclectic one, that supports the Meese and Rogoff (1988) real interest rate differential model augmented with two supply-side variables: the real oil dependence and the relative productivity in the non-tradables. The Euro-area variables support this type of results, although an additional determinant from the demand-side should be added (the relative public expenditure) whereas the real oil variable would be only significant in the short-run.

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Paper provided by European Economy Group in its series European Economy Group Working Papers with number 16.

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Length: 35 pages
Date of creation: 2002
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Handle: RePEc:eeg:euroeg:16

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  33. Camarero, Mariam & Tamarit, Cecilio, 2002. "Oil prices and Spanish competitiveness: A cointegrated panel analysis," Journal of Policy Modeling, Elsevier, vol. 24(6), pages 591-605, October. [Downloadable!] (restricted)
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  38. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  1. Sourafel Girma, 2003. "Absorptive capacity and productivity spillovers From FDI: a threshold regression analysis," European Economy Group Working Papers 25, European Economy Group. [Downloadable!]
    Other versions:
  2. Jaime Turrion & Carmela Martin, 2003. "Eastern Enlargement of the European Union and Foreign Direct Investment Adjustments," European Economy Group Working Papers 24, European Economy Group. [Downloadable!]
  3. Juan Carlos Cuestas & Javier Ordoñez & Mariam Camarero, 2007. "The Role Of Commodity Terms Of Trade In Determining The Real Exchange Rates Of Mediterranean Countries," Working Papers. Serie AD 2007-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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