Measuring the dollar–euro permanent equilibrium exchange rate using the unobserved components model

Xiaoshan Chen and Ronald MacDonald

Journal of International Money and Finance, 2015, vol. 53, issue C, 20-35

Abstract: This paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the Euro–Dollar permanent equilibrium exchange rates (PEER) for the period 1975Q1 to 2008Q4. The results show that for most of the sample period, the Euro–Dollar exchange rate closely followed the values implied by the PEER. The only significant deviations from the PEER occurred in the years immediately before and after the introduction of the single European currency. The forecasting exercise shows that incorporating economic fundamentals provides a better long-run exchange rate forecasting performance than a random walk process.

Keywords: Permanent equilibrium exchange rate; Unobserved components model; Exchange rate forecasting (search for similar items in EconPapers)
JEL-codes: F31 F47 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:53:y:2015:i:c:p:20-35

DOI: 10.1016/j.jimonfin.2014.12.008

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