Trends in European real exchange rates
Trade costs
Martin Berka and
Michael Devereux
Economic Policy, 2013, vol. 28, issue 74, 193-242
Abstract:
We study a newly created panel data set of relative prices for a large number of consumer goods among 31 European countries over a 15-year period. The data set includes eurozone members both before and after the inception of the euro, floating exchange rate countries of Western Europe, and emerging market economies of Eastern and Southern Europe. We find that there is a substantial and continuing deviation from purchasing power parity (PPP) at all levels of aggregation, both for traded and non-traded goods, even among eurozone members. Real exchange rates (RER) exhibit two clear properties in the sample (a) they are closely tied to gross domestic product (GDP) per capita relative to the European average, at all levels of aggregation and for both cross country time series variation; (b) they are highly positively correlated with variation in the relative price of non-traded goods. We then construct a simple two-sector endowment economy model of real exchange rate determination which exhibits these two properties, calibrated to match the data. Simulating the model using the historical relative GDP per capita for each country, we find that for most countries, there is a close fit between the actual and simulated real exchange rate. In terms of policy relevance, the model can offer suggestions of the degree to which real exchange rates in Europe (both in and out of the eurozone) have been overvalued (by approximately 15% in Greece and Portugal and 6% in Italy and Spain).—Martin Berka and Michael B. Devereux
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (26)
Downloads: (external link)
http://hdl.handle.net/10.1111/1468-0327.12006 (application/pdf)
Access to full text is restricted to subscribers.
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:28:y:2013:i:74:p:193-242.
Access Statistics for this article
Economic Policy is currently edited by Ghazala Azmat, Roberto Galbiati, Isabelle Mejean and Moritz Schularick
More articles in Economic Policy from CEPR, CESifo, Sciences Po Contact information at EDIRC., CES Contact information at EDIRC., MSH Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().