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Monetary and real shocks, the business cycle and the value of the euro

  • Renato Filosa
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    The appreciation of the dollar in the aftermath of the launch of the euro came as a surprise to most observers; furthermore, traditional models do not seem to be able to capture the fluctuations of the dollar/euro exchange rate. Is this a confirmation of earlier research according to which no structural model can explain exchange rate dynamics? More optimistically, this study shows that a structural VAR model of the Mundell-Fleming type well explains the behaviour of the euro and its relationships with the fundamentals. Our estimates indicate that the dollar appreciation is primarily due to the cyclical strength of US demand. By contrast, they do not support the often-voiced theory that the appreciation of the dollar is explained by the "new economy". Finally, the model shows that monetary shocks have limited effects on the exchange rate and very strong ones on inflation.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 154.

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    Length: 29 pages
    Date of creation: Jun 2004
    Date of revision:
    Handle: RePEc:bis:biswps:154
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    1. Detken, Carsten & Dieppe, Alistair & Henry, Jérôme & Marin, Carmen & Smets, Frank, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 0160, European Central Bank.
    2. Jonathan Coppel & Martine Durand & Ignazio Visco, 2000. "EMU, The Euro and The European Policy Mix," OECD Economics Department Working Papers 232, OECD Publishing.
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