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Do Fundamentals Explain the Behavior of the Real Effective Exchange Rate?

  • Nilsson, Kristian

    ()

    (National Institute of Economic Research)

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    In this study, we make use of time series analysis to calculate a real effective equilibrium exchange rate for Sweden. The results indicate that the krona was severely overvalued in late 1992, when the fixed exchange rate regime finally was abandoned. Furthermore, the results indicate that the real effective equilibrium exchange rate has depreciated substantially since the mid-1990s, primarily due to deteriorating terms of trade. The results indicate that the krona was undervalued by some 4 to 5 percent at the end of 2000, given the prevailing economic conditions. We also provide some arithmetical examples of SEK/EUR conversion rates, under various assumptions, to provide some guideline if Sweden is to adopt the common currency in the near future.

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    File URL: http://www.konj.se/download/18.70c52033121865b1398800093018/WP_78.pdf
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    Paper provided by National Institute of Economic Research in its series Working Paper with number 78.

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    Length: 35 pages
    Date of creation: 01 Mar 2002
    Date of revision:
    Handle: RePEc:hhs:nierwp:0078
    Contact details of provider: Postal: National Institute of Economic Research, P.O. Box 3116, SE-103 62 Stockholm, Sweden
    Phone: 46-(0)8-453 59 00
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    Web page: http://www.konj.se/
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    1. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate; A Stock-Flow Perspective," IMF Working Papers 94/90, International Monetary Fund.
    2. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals; A Methodological Comparison of Beers and Feers," IMF Working Papers 98/67, International Monetary Fund.
    3. Clark, Peter B. & MacDonald, Ronald, 2004. "Filtering the BEER: A permanent and transitory decomposition," Global Finance Journal, Elsevier, vol. 15(1), pages 29-56.
    4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    5. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
    6. Enrique Alberola & Susana G. Cervero & Humberto Lopez & Angel Ubide, 2000. "Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework," Econometric Society World Congress 2000 Contributed Papers 0051, Econometric Society.
    7. Peter B. Clark & Steven A. Symansky & Tamim Bayoumi & Mark P. Taylor, 1994. "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," IMF Working Papers 94/17, International Monetary Fund.
    8. Jonathan D. Ostry, 1988. "The Balance of Trade, Terms of Trade, and Real Exchange Rate: An Intertemporal Optimizing Framework," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 541-573, December.
    9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
    10. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    12. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
    13. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    14. Vincent Koen & Laurence Boone & Alain de Serres & Nicola Fuchs, 2001. "Tracking the Euro," OECD Economics Department Working Papers 298, OECD Publishing.
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