Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models
AbstractWe propose an alterative approach to obtaining a permanent equilibrium exchange rate (PEER), based on an unobserved components (UC) model. This approach offers a number of advantages over the conventional cointegration-based PEER. Firstly, we do not rely on the prerequisite that cointegration has to be found between the real exchange rate and macroeconomic fundamentals to obtain non-spurious long-run relationships and the PEER. Secondly, the impact that the permanent and transitory components of the macroeconomic fundamentals have on the real exchange rate can be modelled separately in the UC model. This is important for variables, where the long and short-run effects may drive the real exchange rate in opposite directions, such as the relative government expenditure ratio.
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Bibliographic InfoPaper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2010_16.
Date of creation: May 2010
Date of revision:
Permanent Equilibrium Exchange Rate; Unobserved Components Model; Exchange rate forecasting.;
Other versions of this item:
- Chen, Xiaoshan & MacDonald, Ronald, 2010. "Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models," SIRE Discussion Papers 2010-41, Scottish Institute for Research in Economics (SIRE).
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-17 (All new papers)
- NEP-CBA-2010-07-17 (Central Banking)
- NEP-FOR-2010-07-17 (Forecasting)
- NEP-MON-2010-07-17 (Monetary Economics)
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