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Determinants of the euro real effective exchange rate: a BEER/PEER approach

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Author Info
Francisco Maeso-Fernandez (Universidad de Murcia, Murcia, Spain)
Chiara Osbat (European Central Bank)
Bernd Schnatz (European Central Bank)

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Abstract

This paper presents an empirical analysis of the medium-term determinants of the euro effective exchange rate. The empirical analysis builds on synthetic quarterly data from 1975 to 1998, and derives a Behavioural Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). Four different model specifications are retained, due to the difficulties encountered in specifying an encompassing model. Results indicate that differentials in real interest rates and productivity, and (in some specifications) the relative fiscal stance and the real price of oil, have a significant influence on the euro effective exchange rate. Assessing the existence and the extent of the over- or undervaluation of the exchange rate is not straightforward, since these different specifications often lead to contrasting findings. However, all four models point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen.

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Publisher Info
Paper provided by EconWPA in its series International Finance with number 0111003.

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Length: 48 pages
Date of creation: 21 Nov 2001
Date of revision:
Handle: RePEc:wpa:wuwpif:0111003

Note: Type of Document - Acrobat PDF; prepared on IBM PC - windows NT; to print on PostScript; pages: 48; figures: included
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Related research
Keywords: euro; equilibrium exchange rates; cointegration; gonzalo- granger decomposition; fundamental analysis; BEER; PEER;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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References listed on IDEAS
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    Other versions:
  2. Clostermann, Jörg & Schnatz, Bernd, 2000. "The determinants of the euro-dollar exchange rate : synthetic fundamentals and a non-existing currency," Discussion Paper Series 1: Economic Studies 2000,02, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  20. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate - A Stock-Flow Perspective," IMF Working Papers 94/90, International Monetary Fund.
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