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Measuring the dollar–euro permanent equilibrium exchange rate using the unobserved components model

Listed author(s):
  • Chen, Xiaoshan
  • MacDonald, Ronald

This paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the Euro–Dollar permanent equilibrium exchange rates (PEER) for the period 1975Q1 to 2008Q4. The results show that for most of the sample period, the Euro–Dollar exchange rate closely followed the values implied by the PEER. The only significant deviations from the PEER occurred in the years immediately before and after the introduction of the single European currency. The forecasting exercise shows that incorporating economic fundamentals provides a better long-run exchange rate forecasting performance than a random walk process.

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File URL: http://www.sciencedirect.com/science/article/pii/S0261560614002228
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 53 (2015)
Issue (Month): C ()
Pages: 20-35

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Handle: RePEc:eee:jimfin:v:53:y:2015:i:c:p:20-35
DOI: 10.1016/j.jimonfin.2014.12.008
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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