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Determinants of the euro real effective exchange rate: a BEER/PEER approach

Author

Listed:
  • Francisco Maeso-Fernandez

    (Universidad de Murcia, Murcia, Spain)

  • Chiara Osbat

    (European Central Bank)

  • Bernd Schnatz

    (European Central Bank)

Abstract

This paper presents an empirical analysis of the medium-term determinants of the euro effective exchange rate. The empirical analysis builds on synthetic quarterly data from 1975 to 1998, and derives a Behavioural Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). Four different model specifications are retained, due to the difficulties encountered in specifying an encompassing model. Results indicate that differentials in real interest rates and productivity, and (in some specifications) the relative fiscal stance and the real price of oil, have a significant influence on the euro effective exchange rate. Assessing the existence and the extent of the over- or undervaluation of the exchange rate is not straightforward, since these different specifications often lead to contrasting findings. However, all four models point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen.

Suggested Citation

  • Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2001. "Determinants of the euro real effective exchange rate: a BEER/PEER approach," International Finance 0111003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0111003
    Note: Type of Document - Acrobat PDF; prepared on IBM PC - windows NT; to print on PostScript; pages: 48; figures: included
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    References listed on IDEAS

    as
    1. Kostial, Kristina & Gropp, Reint, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series 31, European Central Bank.
    2. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
    3. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688, Elsevier.
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    5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    6. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
    7. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729, Elsevier.
    8. Dickey, David A & Pantula, Sastry G, 1987. "Determining the Ordering of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 455-461, October.
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    More about this item

    Keywords

    euro; equilibrium exchange rates; cointegration; gonzalo- granger decomposition; fundamental analysis; BEER; PEER;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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