Quo vadis Euro?

Enrique Alberola (), Susana Garcia-Cervero, Humberto Lopez () and Angel Ubide ()
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Susana Garcia-Cervero: Deutsche Bank

International Finance from EconWPA

Abstract: 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.

Keywords: equilibrium exchange rates; panel cointegration; Euro; G-7 currencies (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ifn and nep-mon
Date: 2005-07-08
Note: Type of Document - pdf; pages: 18. publishe in The European Journal of Finance 8, 352–370 (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0507004

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