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A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro

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Author Info

  • Lindblad, Hans

    ()
    (Sveriges Riksdag)

  • Sellin, Peter

    ()
    (Monetary Policy Department, Central Bank of Sweden)

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    Abstract

    In this paper we simultaneously estimate the real exchange rates between the Swedish Krona, the US Dollar and the Euro. A prime candidate for explaining the exchange rate movements is relative potential output. Since this variable is unobservable, cyclical and potential output are estimated in an unobserved components framework together with a Phillips curve. Our empirical exchange rate results are in line with theory. Increases in relative potential output and the terms of trade strengthen the exchange rate, while a relative increase of the fraction of middle-aged people in the population and budget deficits depreciate the exchange rate. The estimates suggest that the recent deterioration of the relative budget situation for the US versus Europe is a prime candidate for explaining the USD/EUR exchange rate change lately.

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    Bibliographic Info

    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 193.

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    Length: 37 pages
    Date of creation: 01 May 2006
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0193

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    Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
    Phone: 08 - 787 00 00
    Fax: 08-21 05 31
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    Web page: http://www.riksbank.com/
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    Related research

    Keywords: Equilibrium real exchange rate; expectations augmented Phillips curve; unobserved-components model;

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