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Equilibrium Real Effective Exchange Rates and Real Exchange Rate Misalignments: Time Series vs. Panel Estimates

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  • Oliver Hossfeld

    () (HHL – Leipzig Graduate School of Management)

Abstract

In this paper we apply the Behavioral Equilibrium Exchange Rate (BEER) approach developed by Clark and MacDonald (1998) to derive equilibrium real effective exchange rates and currency misalignments for the US and its major 16 trading partners over a sample from 1986Q1 to 2006Q4. Cointegration and panel cointegration techniques are applied to derive fully country-specific measures of misalignment and country-specific measures based on panel estimates. We do not only apply the popular first generation panel unit root and panel cointegration tests, but also two recently introduced classes of tests of the second generation: the CIPS (cross-sectionally augmented IPS) panel unit root tests by Pesaran (2007) as well as the error-correction-based tests for panel cointegration byWesterlund (2007), which both account for possible cross-sectional dependencies among the units included in the panel. Using the estimates obtained over a restricted sample, forecasting tests are conducted to assess the relative forecasting performance of pooled vs. heterogeneous estimators. We find that pooling the data delivers more reliable results when calculating equilibrium exchange rates though the implicit homogeneity restriction is statistically rejected. This result is especially remarkable, since we have given the heterogeneous estimator an ’unfair’ advantage by choosing the country-specific model (of up to 21 possible ones) with the best out-of-sample performance prior to comparing it to two final panel specifications. Based on this result, we re-estimate our preferred specification and calculate real effective exchange rate misalignments over the full sample. While we find strong evidence in favor of the Balassa-Samuelson-effect, evidence in favor of other commonly hypothesized fundamentals is weak.

Suggested Citation

  • Oliver Hossfeld, 2010. "Equilibrium Real Effective Exchange Rates and Real Exchange Rate Misalignments: Time Series vs. Panel Estimates," Working Papers 2010.3, International Network for Economic Research - INFER.
  • Handle: RePEc:inf:wpaper:2010.3
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    Cited by:

    1. Fischer, Christoph & Hossfeld, Oliver, 2014. "A consistent set of multilateral productivity approach-based indicators of price competitiveness," Discussion Papers 10/2014, Deutsche Bundesbank.
    2. repec:fgv:epgrbe:v:72:y:2018:i:4:a:62975 is not listed on IDEAS
    3. Fidora, Michael & Giordano, Claire & Schmitz, Martin, 2017. "Real exchange rate misalignments in the euro area," Working Paper Series 2108, European Central Bank.
    4. Emerson Fernandes Marçal & Priscila Fernandes Ribeiro, 2011. "Levado pelos Fundamentos? Estimando o Desalinhamento Cambial Norte-Americano a partir de Técnicas de Cointegração," Discussion Papers 1674, Instituto de Pesquisa Econômica Aplicada - IPEA.
    5. Fedoseeva Svetlana, 2013. "(A)symmetry, (Non)linearity and Hysteresis of Pricing-To-Market: Evidence from German Sugar Confectionery Exports," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 11(1), pages 1-17, January.
    6. Fischer, Christoph & Hossfeld, Oliver, 2014. "A consistent set of multilateral productivity approach-based indicators of price competitiveness – Results for Pacific Rim economies," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 152-169.
    7. Mariarosaria Comunale, 2019. "Long‐run determinants and misalignments of the real effective exchange rate in the EU," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(5), pages 649-672, November.
    8. Marçal, Emerson Fernandes & Zimmermann, Beatrice & de Prince, Diogo & Merlin, Giovanni, 2018. "Assessing interdependence among countries' fundamentals and its implications for exchange rate misalignment estimates: An empirical exercise based on GVAR," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 72(4), December.
    9. Claire Giordano, 2019. "How frequent a BEER? Assessing the impact of data frequency on real exchange rate misalignment estimation," Questioni di Economia e Finanza (Occasional Papers) 522, Bank of Italy, Economic Research and International Relations Area.
    10. repec:gam:jsusta:v:9:y:2017:i:4:p:568-:d:95321 is not listed on IDEAS

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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