Filtering the Beer: A Permanent and Transitory Decomposition

Peter Clark and Ronald MacDonald

No 2000/144, IMF Working Papers from International Monetary Fund

Abstract: In this paper we extend the BEER (Behavioral Equilibrium Exchange Rate) approach which identifies an estimated equilibrium relationship between the real exchange rate and economic fundamentals. Here the economic fundamentals are decomposed using Johansen cointegration methods into transitory and permanent components, with the latter used to estimate the Permanent Equilibrium Exchange Rate, or PEER, for the U.S. and Canadian dollars and the pound sterling. The BEER and the PEER move closely together for the U.S. and Canadian dollars and generally track the actual exchange rate. By contrast, for the pound sterling the BEER and the PEER diverge sharply, with the latter following the actual exchange rate quite closely.

Keywords: WP; real interest rate; U.S. dollar; Real exchange rates; equilibrium exchange rates; U.K. BEER; BEER approach; equilibrium exchange rate; U.K. pound; exchange rate disequilibrium; interest differential; Exchange rates; Real interest rates; Real effective exchange rates; Currencies (search for similar items in EconPapers)
Pages: 38
Date: 2000-08-01
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Citations: View citations in EconPapers (78)

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Journal Article: Filtering the BEER: A permanent and transitory decomposition (2004)
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