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Quo vadis Euro?

  • Enrique Alberola

    (Banco de España)

  • Susana Garcia-Cervero

    (Deutsche Bank)

  • Humberto López

    (World Bank)

  • Angel Ubide

    (Tudor Investments)

This paper calculates the equilibrium exchange rates for the Euro and the rest of the G-7 currencies. Building on the methodology of Alberola et al., it is shown that the stock of net foreign assets and the evolution of productivity are the fundamentals underlying the behaviour of the real exchange rate. Panel cointegration techniques allow for the extraction, using an unobserved components methodology, of a time- varying equilibrium real exchange rate, and deviations from this equilibrium provide an estimate of the degree of multilateral misalignment. Finally, an algebraic transformation converts these multilateral equilibrium real rates into bilateral equilibrium nominal rates. The results uncover that the Euro was slightly undervalued by the start of Stage III of EMU and that, despite a faint fall of its fundamentals since then, the slide during 1999 has widened the misalignment above 10% against other main currencies.

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Paper provided by EconWPA in its series International Finance with number 0507004.

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Length: 18 pages
Date of creation: 08 Jul 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0507004
Note: Type of Document - pdf; pages: 18. publishe in The European Journal of Finance 8, 352–370 (2002)
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