A new approach to estimating equilibrium exchange rates for small open economies: The case of Canada

Tino Berger and Bernd Kempa

No 509, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: This paper proposes a new approach to estimating equilibrium exchange rates for small open economies. We set up a simple structural model of output, the rate of in ation and the real exchange rate. These observed variables are explained by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974-2008 we jointly estimate the unobserved components and the structural pa- rameters using the Kalman lter and Bayesian technique. We nd that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate.

Keywords: equilibrium exchange rate; unobserved components; Kalman lter; Bayesian analysis; Importance sampling (search for similar items in EconPapers)
JEL-codes: C22 G12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2009-08
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cqe:wpaper:0509

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