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Temporal dimension and equilibrium exchange rate: A FEER/BEER comparison

  • Lòpez-Villavicencio, Antonia
  • Mazier, Jacques
  • Saadaoui, Jamel

This paper investigates the temporal links between two models of equilibrium exchange rate, namely the behavioral and the fundamental approaches. Our results show that, even though in the long-run they are closely related, important differences are observed for some countries and/or some periods. Contrary to previous contributions, we analyze the factors that explain this disconnection. We outline structural changes in matter of competitiveness, the dynamics of foreign assets and valuation effects as explanations. This novel evidence is important if the two approaches for assessing misalignments are used for policy decisions such as setting tariffs to cope with the “currency war”.

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File URL: http://www.sciencedirect.com/science/article/pii/S1566014111000616
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Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 13 (2012)
Issue (Month): 1 ()
Pages: 58-77

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Handle: RePEc:eee:ememar:v:13:y:2012:i:1:p:58-77
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620356

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  1. Rubaszek, Michal & Rawdanowicz, Lukasz, 2009. "Economic convergence and the fundamental equilibrium exchange rate in central and eastern Europe," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 277-284, December.
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  3. Barisone, Giacomo & Driver, Rebecca L. & Wren-Lewis, Simon, 2006. "Are our FEERs justified?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 741-759, August.
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  5. Steven Dunaway & Lamin Leigh & Xiangming Li, 2009. "How Robust Are Estimates Of Equilibrium Real Exchange Rates: The Case Of China," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 361-375, 08.
  6. Sophie Béreau & Antonia Lopez Villavicencio & Valérie Mignon, 2008. "Nonlinear Adjustment of the Real Exchange Rate Towards its Equilibrium Value: a Panel Smooth Transition Error Correction Modelling," Working Papers 2008-23, CEPII research center.
  7. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
  8. Nabil Aflouk & Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2011. "Exchange Rate Misalignments and World Imbalances: a FEER Approach for Emerging Countries," Post-Print halshs-00484808, HAL.
  9. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  10. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  11. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series 1151, European Central Bank.
  12. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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  14. repec:cai:recosp:reco_545_0001 is not listed on IDEAS
  15. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November.
  16. Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments at World and European Levels: a FEER Approach," Economie Internationale, CEPII research center, issue 121, pages 25-58.
  17. William R. Cline, 2008. "Estimating Consistent Fundamental Equilibrium Exchange Rates," Working Paper Series WP08-6, Peterson Institute for International Economics.
  18. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals; A Methodological Comparison of Beers and Feers," IMF Working Papers 98/67, International Monetary Fund.
  19. Uz, Idil & Ketenci, Natalya, 2008. "Panel analysis of the monetary approach to exchange rates: Evidence from ten new EU members and Turkey," Emerging Markets Review, Elsevier, vol. 9(1), pages 57-69, March.
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  22. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "International Investors, the U.S. Current Account, and the Dollar," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 1-66.
  23. Agnès Bénassy-Quéré & Sophie Béreau & Valérie Mignon, 2009. "Robust Estimations Of Equilibrium Exchange Rates Within The G20: A Panel Beer Approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(5), pages 608-633, November.
  24. Yin-Wong Cheung & Menzie Chinn & Eiji Fujii, 2009. "Pitfalls in Measuring Exchange Rate Misalignment," Open Economies Review, Springer, vol. 20(2), pages 183-206, April.
  25. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
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