Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta

Enrique Alberola () and Humberto Lopez ()

Spanish Economic Review, 2001, vol. 3, issue 1, pages 23-40

Abstract: A simple cointegration methodology is used to compute the equilibrium real exchange rate for the peseta. The stock of foreign assets and the evolution of sectoral prices are considered to be the fundamentals for the real exchange rate. After testing for cointegration, we proceed to decompose the series into a permanent and a transitory component, following the method devised by Gonzalo and Granger. The permanent component of the real exchange rate corresponds to its (time-varying) equilibrium value, and the deviation of the actual real exchange rate from this equilibrium value gives an estimation of the degree of misalignment of the real exchange rate. By the end of the sample (1998:1), the peseta is estimated to be undervalued around 6%.

Keywords: Equilibrium exchange rates; cointegration; Balassa-Samuelson; current account (search for similar items in EconPapers)
JEL-codes: C32 F31 F41 (search for similar items in EconPapers)
Date: 2001-04-18
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Working Paper: Internal and External Exchange Rate Equilibrium in a Cointegration Framework. An Application to the Spanish Peseta (1999)
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