The Equilibrium Exchange Rate in a Bayesian State-Space Model: An Application to Australia

Martin Melecký

International Finance from University Library of Munich, Germany

Abstract: The equilibrium exchange rate is a closely scrutinized variable in international finance and monetary economics. A model to estimate an equilibrium exchange rate is proposed in this paper. It consists of several building blocks: a state-space structure, uncovered interest parity and the equilibrium exchange rate determinants. Prior information about the impact of the determinants is used when Bayesian estimation of the model is carried out. The estimates reveal that on average the Australian dollar was overvalued by about 3 percent during the period 1984-2004. The major overvaluations of the AUD/USD exchange rate took place during the period 1986-1988, and around the years 1990, and 2003. The information content of the acquired estimates of exchange rate misalignments appears to be superior to the purchasing parity equivalent.

Keywords: Exchange-Rate Modeling; Equilibrium Exchange Rate; State-Space Model; Bayesian Estimation and Inference; Australian Dollar (search for similar items in EconPapers)
JEL-codes: C11 F31 F41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005-05-07
Note: Type of Document - pdf; pages: 25
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0505005

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