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The equilibrium exchange rates of European currencies and the transition to euro

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  • C. Couharde
  • J. Mazier

Abstract

The introduction of the euro raised two questions: what was the appropriate exchange rate of the European currencies for entry in the EMU? What were the main determinants of the external value of the euro? To bring some insight in the matter, the concept of equilibrium exchange rates was used, which illustrated the divergence between exchange rates and long run fundamentals. For each country, the equilibrium exchange rate was calculated from a simplified model of external trade which, in its reduced form, allows one to explicitly represent the structural determinants of exchange rates. To obtain supplementary results we also make an analysis of unit cost levels. The results suggest that although the central parities in force within the EMS were rather satisfactory and ought not to give rise subsequently to intra-European tensions, the European currencies were overvalued in terms of their equilibrium exchange rates and the dollar was undervalued. This misalignment thus provides support to justify the depreciation of the euro since its launch.

Suggested Citation

  • C. Couharde & J. Mazier, 2001. "The equilibrium exchange rates of European currencies and the transition to euro," Applied Economics, Taylor & Francis Journals, vol. 33(14), pages 1795-1801.
  • Handle: RePEc:taf:applec:v:33:y:2001:i:14:p:1795-1801
    DOI: 10.1080/00036840010021717
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    References listed on IDEAS

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    1. William Ellery Channing, 1994. "Change," American Journal of Economics and Sociology, Wiley Blackwell, vol. 53(1), pages 15-15, January.
    2. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, February.
    3. 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.
    4. Jerome L. Stein, 1995. "The Fundamental Determinants of the Real Exchange Rate of the U. S. Dollar Relative to Other G-7 Currencies," IMF Working Papers 1995/081, International Monetary Fund.
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    Cited by:

    1. Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments at World and European Levels: a FEER Approach," International Economics, CEPII research center, issue 121, pages 25-58.
    2. Jamel Saadaoui, 2016. "Post-Brexit FEER," CEPN Working Papers hal-01394814, HAL.
    3. Holtemöller, Oliver & Mallick, Sushanta, 2013. "Exchange rate regime, real misalignment and currency crises," Economic Modelling, Elsevier, vol. 34(C), pages 5-14.
    4. Dovern Jonas & Jannsen Nils & Scheide Joachim, 2009. "Die Bedeutung monetärer Größen für die deutsche Wachstumsschwäche 1995–2005," Review of Economics, De Gruyter, vol. 60(1), pages 17-36, April.
    5. Jamel Saadaoui, 2016. "Sur la situation des mésalignements de taux de change après le Brexit," Bulletin de l'Observatoire des politiques économiques en Europe, Observatoire des Politiques Économiques en Europe (OPEE), vol. 35(1), pages 9-13, December.
    6. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]," MPRA Paper 51332, University Library of Munich, Germany.

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