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The Euro-Dollar exchange rate: Is it fundamental?

  • Mariam Camarero
  • Javier Ordóñez
  • Cecilio Tamarit

In this paper we have applied two different but complementary techniques and approaches to the study of the evolution of the dollar real exchange rate in relation with the Euro-area currencies. First, using the panel cointegration methodology for both homogeneous and heterogeneous panels, we study the long-run relationship between the bilateral real exchange rate of the dollar versus 10 European countries, Canada and Japan. Second, in a time series framework, we use Euro-area aggregate or "synthetic" variables to study the behavior of the dollar/Euro real exchange rate. The selected specification obtained using the panel techniques is an eclectic one, that supports the Meese and Rogoff (1988) real interest rate differential model augmented with two supply-side variables: the real oil dependence and the relative productivity in the non-tradables. The Euro-area variables support this type of results, although an additional determinant from the demand-side should be added (the relative public expenditure) whereas the real oil variable would be only significant in the short-run.

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Paper provided by European Economy Group in its series European Economy Group Working Papers with number 16.

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Length: 35 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:eeg:euroeg:16
Contact details of provider: Postal: Despacho 104.Pabelloon de Segundo, Facultad de Economicas. Universidad Complutense de Madrid. 28223 Pozuelo de Alarcon, Madrid
Phone: 0034913942454
Fax: 0034913942457
Web page: http://www.ucm.es/info/econeuro
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