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A new approach to estimating equilibrium exchange rates for small open economies: The case of Canada


  • Tino Berger
  • Bernd Kempa


This paper proposes a new approach to estimating equilibrium exchange rates for small open economies. We set up a simple structural model of output, the rate of in ation and the real exchange rate. These observed variables are explained by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974-2008 we jointly estimate the unobserved components and the structural pa- rameters using the Kalman lter and Bayesian technique. We nd that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate.

Suggested Citation

  • Tino Berger & Bernd Kempa, 2009. "A new approach to estimating equilibrium exchange rates for small open economies: The case of Canada," CQE Working Papers 0509, Center for Quantitative Economics (CQE), University of Muenster.
  • Handle: RePEc:cqe:wpaper:0509

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    equilibrium exchange rate; unobserved components; Kalman lter; Bayesian analysis; Importance sampling;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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