Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach
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 specifications are retained, due to the difficulties encountered in specifying an encompassing model. The 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 specifications point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen. Copyright Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia 2002.
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Volume (Year): 41 (2002)
Issue (Month): 4 (December)
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References listed on IDEAS
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- Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
- Coenen, Günter & Vega, Juan Luis, 1999.
"The demand for M3 in the euro area,"
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- Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
- Gropp, Reint & Kostial, Kristina, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series 0031, European Central Bank.
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