On the equilibrium value of the peseta

Ivan Paya (), A. Duarte and K. Holden

Applied Financial Economics, 2003, vol. 13, issue 5, 317-335

Abstract: This paper empirically analyses the equilibrium value of the peseta in the light of recent contributions in this field of study. Following MacDonald (IMF Working Paper 97/21, 1997), the approach to the long-run relationship between the real effective exchange rate of the peseta and its fundamental determinants focus on the reasons that keep the actual value of the peseta away from that predicted by the theory of PPP. The cointegration method is used to estimate the reduced form of a multilateral model for Spain for the period 1977-1997. As a result, the estimated long-run exchange rate appreciates with positive shocks to differences in productivity, terms of trade and net foreign assets, and depreciates when price differentials increases. The equilibrium correction model helps to explain short-run deviations of the actual from equilibrium exchange rate and to forecast the peseta real effective exchange rate up to the fourth-quarter of 1998.

Date: 2003
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DOI: 10.1080/09603100110116425

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