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Temporal dimension and equilibrium exchange rate: A FEER/BEER comparison

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  • Lòpez-Villavicencio, Antonia
  • Mazier, Jacques
  • Saadaoui, Jamel

Abstract

This paper investigates the temporal links between two models of equilibrium exchange rate, namely the behavioral and the fundamental approaches. Our results show that, even though in the long-run they are closely related, important differences are observed for some countries and/or some periods. Contrary to previous contributions, we analyze the factors that explain this disconnection. We outline structural changes in matter of competitiveness, the dynamics of foreign assets and valuation effects as explanations. This novel evidence is important if the two approaches for assessing misalignments are used for policy decisions such as setting tariffs to cope with the “currency war”.

Suggested Citation

  • Lòpez-Villavicencio, Antonia & Mazier, Jacques & Saadaoui, Jamel, 2012. "Temporal dimension and equilibrium exchange rate: A FEER/BEER comparison," Emerging Markets Review, Elsevier, vol. 13(1), pages 58-77.
    • Handle: RePEc:eee:ememar:v:13:y:2012:i:1:p:58-77
    DOI: 10.1016/j.ememar.2011.10.001
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    More about this item

    Keywords

    Equilibrium exchange rate; Cointegration; Net foreign assets; Current account; Exchange rate;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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