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The empirical determinants of the Euro: Short and long run perspectives

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  • Chinn, Menzie David

Abstract

The behavior of the dollar/euro exchange rate is modeled using a monetary model of the exchange rate. The econometric analysis is complicated by the short sample span of actual euro data available for analysis. Hence, data on a synthetic euro are used. The assumptions underlying the monetary approach are discussed. A cointegrating relationship involving the exchange rate, money stocks, industrial production, interest and inflation rates, augmented by a relative price of nontradables, is identified for the 1991M08-1999M12 period using the Johansen procedure. The model implies that the euro was undervalued by about 13-15% in January 2000. This finding is robust to the use of alternative sample periods, and alternative estimation methodologies such as single-equation error correction and first differences specifications. A longer term perspective is provided by a productivity-based model of the real value of the euro. Some panel regression estimates of the relationship between intercountry relative productivity differentials and real exchange rates is presented. Using these estimates to conduct some calculations, one comes to the conclusion that unless drastic changes to productivity trends occur, there is little reason to believe that the real value of the euro will deviate from its current zero-drift path. --

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Bibliographic Info

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2000,43.

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Date of creation: 2000
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Handle: RePEc:zbw:sfb373:200043

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Keywords: euro; exchange rate; monetary model; productivity;

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References

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  1. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers, UCLA Department of Economics 122, UCLA Department of Economics.
  2. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Working Papers 3684, National Bureau of Economic Research, Inc.
  3. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0976, Econometric Society.
  4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  5. Jonathan Coppel & Martine Durand & Ignazio Visco, 2000. "EMU, The Euro and The European Policy Mix," OECD Economics Department Working Papers 232, OECD Publishing.
  6. Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(05), pages 984-1014, October.
  7. Rogoff, Kenneth, 1999. "Monetary Models of Dollar/Yen/Euro Nominal Exchange Rates: Dead or Undead?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(459), pages F655-59, November.
  8. Demertzis, Maria & Hughes Hallett, Andrew, 1999. "EMU and the External Value of the Euro," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2058, C.E.P.R. Discussion Papers.
  9. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 105-132, February.
  10. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  11. Michel Aglietta & Camille Baulant & Virginie Coudert, 1997. "Why the Euro will be Strong: an Approach Based on Equilibrium Exchange Rates," Working Papers 1997-18, CEPII research center.
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Cited by:
  1. Gadea, Maria-Dolores & Montanes, Antonio & Reyes, Marcelo, 2004. "The European Union currencies and the US dollar: from post-Bretton-Woods to the Euro," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(7-8), pages 1109-1136.
  2. C. Randall Henning, 2006. "The External Policy of the Euro Area: Organizing for Foreign Exchange Intervention," Working Paper Series, Peterson Institute for International Economics WP06-4, Peterson Institute for International Economics.
  3. Heimonen, Kari, 2009. "The euro-dollar exchange rate and equity flows," Review of Financial Economics, Elsevier, Elsevier, vol. 18(4), pages 202-209, October.
  4. Philip Arestis & Iris Biefang- Frisancho Mariscal & Andrew Brown & Malcolm Sawyer, 2001. "The Causes of Euro Instability," Macroeconomics, EconWPA 0103005, EconWPA.
  5. repec:gai:ppaper:52 is not listed on IDEAS
  6. Pavel Trunin & Dmitriy Kniazev & Ekaterina Kuduykina, 2010. "Perspective issues in the CBR`s exchange rate policy," Research Paper Series, Gaidar Institute for Economic Policy, Gaidar Institute for Economic Policy, issue 144P.
  7. Philip Arestis & Andrew Brown & Kostas Mouratidis & Malcolm Sawyer, 2002. "The Euro: Reflections on the first three years," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(1), pages 1-17.
  8. Michael Frenkel & Isabell Koske, 2004. "How well can monetary factors explain the exchange rate of the euro?," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 32(3), pages 233-244, September.

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