Shocks, Competitiveness, and Bilateral Real Exchange Rates in the Euro Area

Stefan Hohberger

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper analyses the structural drivers of bilateral real exchange rate dynamics within the euro area and between the euro area and the United States over 1999-2025, using an estimated seven-country New Keynesian DSGE model of the world economy. The model features an ex ante identical structure across the country blocs and is estimated on a unified information set. International financial market shocks dominate the EA-US bilateral real exchange rate dynamics, with productivity differentials generating persistent euro appreciation pressure. Rising world demand and a secular decline in EA home bias exert partially offsetting euro depreciation pressure. Within the monetary union, the pre-crisis appreciation of France, Italy, and Spain relative to Germany reflects country-specific combinations of demand, supply, and trade disturbances that broadly unwind after 2008. Trend productivity differentials emerge as the dominant low-frequency driver, most starkly for Italy, where persistently slower trend productivity growth drives the bilateral real exchange rate through the sample. Model validation against empirical moments, exchange rate pass-through benchmarks, and off-model indicators confirms the empirical plausibility of the structural identification.

Keywords: real exchange rates; euro area competitiveness; multi-country DSGE; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C51 E32 F41 F45 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2026-10
New Economics Papers: this item is included in nep-dge, nep-eec and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-85

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