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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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  15. MacDonald, Ronald, 1998. "What determines real exchange rates?: The long and the short of it," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(2), pages 117-153, June. [Downloadable!] (restricted)
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  19. Kenneth Rogoff, 1992. "Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate," NBER Working Papers 4119, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. 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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  26. Ronald MacDonald & Jun Nagayasu, 2000. "The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study," IMF Staff Papers, Palgrave Macmillan Journals, vol. 47(1), pages 5. [Downloadable!] (restricted)
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  27. Peter B. Clark & Ronald MacDonald, 1998. "Exchange Rates and Economic Fundamentals - A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
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  29. Maurice Obstfeld., 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers C93-011, University of California at Berkeley.
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  31. Campbell, John Y. & Clarida, Richard H., 1987. "The dollar and real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 103-139, January. [Downloadable!] (restricted)
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  32. Kenneth Rogoff & Yu-chin Chen, 2002. "Commodity Currencies and Empirical Exchange Rate Puzzles," IMF Working Papers 02/27, International Monetary Fund.
  33. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April. [Downloadable!] (restricted)
  34. Camarero, Mariam & Tamarit, Cecilio, 2002. "A panel cointegration approach to the estimation of the peseta real exchange rate," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 371-393, September. [Downloadable!] (restricted)
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  35. Wu, Jyh-Lin, 1999. "A re-examination of the exchange rate-interest differential relationship: evidence from Germany and Japan," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 319-336, February. [Downloadable!] (restricted)
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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!]
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  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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