A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro

Hans Lindblad () and Peter Sellin ()
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Hans Lindblad: Sveriges Riksdag, Postal: SE-100 12 Stockholm, Sweden
Peter Sellin: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 193, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: In this paper we simultaneously estimate the real exchange rates between the Swedish Krona, the US Dollar and the Euro. A prime candidate for explaining the exchange rate movements is relative potential output. Since this variable is unobservable, cyclical and potential output are estimated in an unobserved components framework together with a Phillips curve. Our empirical exchange rate results are in line with theory. Increases in relative potential output and the terms of trade strengthen the exchange rate, while a relative increase of the fraction of middle-aged people in the population and budget deficits depreciate the exchange rate. The estimates suggest that the recent deterioration of the relative budget situation for the US versus Europe is a prime candidate for explaining the USD/EUR exchange rate change lately.

Keywords: Equilibrium real exchange rate; expectations augmented Phillips curve; unobserved-components model (search for similar items in EconPapers)
JEL-codes: C32 E31 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-ifn, nep-mac and nep-mon
Date: Written 2006-05-01
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