The Eurozone’s Equilibrium Real Exchange Rates

Antonin Rusek

Department of Economics, Susquehanna University, Selinsgrove, USA.

DOI: 10.4236/me.2012.35070                

Abstract

The equilibrium real exchange rate is the one of the key concepts in the macroeconomic and policy analysis. The im-portance of this concept yet increases in a currency union. In general, the real exchange rate misalignments are per-ceived to be the causes of the loss of a competitiveness, growth slowdowns and currency crises in cases of overvalua-tion, overheating and inflation in cases of undervaluation, sectoral misallocations of resources and global economic imbalances. In a case of a currency union the divergent dynamics of real effective exchange rates in the individual countries—both the actual and an equilibrium—will exacerbate both economic and political tensions (in addition to above mentioned problems) and may lead to the collapse of not only the monetary union per se but the underlying integration processes as well. This paper employs the estimation of the BEER (behavioral equilibrium exchange rate) for the seven Eurozone countries: Germany, France, Italy, Spain, Greece, Portugal and Ireland for the 1999:1-2011:3 period. The purpose is to compare the performance of the Eurozone “powerhouses” (Germany and France) with the countries on the Mediterranean littoral plus Ireland (so called “troubled periphery”). Those estimates are then used to calculate the degree of Euro’s misalignment and the magnitude, persistence and the direction of dynamic tendencies within the Eurozone itself.

Keywords

Real Exchange Rate; Equilibrium; Misalignment

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	S. Tilford, “Will the Eurozone Crack?” Center for European Reform, London, September 2006.
[2]	J. Baffes, I. A. Elba-dawi and S. A. O’Connell, “Single Equation Estimation of the Equilibrium Real Exchange Rate,” Policy Research Working Paper 1800, The World Bank, Washington DC, August 1997.
[3]	T. Bayoumi, H. Faruqee and J. Lee, “A Fair Ex-change? Theory and Practice of Calculating Equilibrium Ex-change Rates,” IMF Working Paper WP/05/229, International Monetary Fund, Washington DC, December 2005.
[4]	W. R. Cline and J. Williamson, “Estimates of Fundamental Equilibrium Exchange Rates,” Policy Brief PB11-5, Peterson Institute of International Economics, Washington DC, May 2011.
[5]	T. Feyzioglu, “Estimating the Equilibrium Real Exchange Rate: An application to Finland,” IMF Working Paper WP/97/109, International Monetary Fund, Washington DC, September 1997.
[6]	S. Wren-Lewis, “Estimates of Equilibrium Exchange Rates for Sterling Against The Euro,” HM Treasury Printing Office, London, 2003
[7]	R. Y. Siregar and R. Rajan, “Model of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature,” Discussion Paper No. 0604, Centre for International Economic Studies, University of Adelaide, Ade-laide, 2006.
[8]	J. Stein, “The Natural Real Exchange Rate of the US Dollar and Determinants of Capital Flows,” In J. Williamson, Ed., Estimating Equilibrium Exchange Rates, Institute of International Economics, Washington DC, 1994, pp. 133- 176.
[9]	G. Gandolfo and A. Felettigh, “The NATREX: An Alternative Approach. Theory and Empirical Verifications,” Working Paper No. 52, University “La Sapienza”, Rome, 1998.
[10]	J. Stein, “The Evolution of the Real Value of the US Dollar Relative to the G7 Currencies,” In R. MacDonald and J. Stein, Eds., Equilibrium Exchange Rates, Kluwer Academic Publishers, Amsterdam, 1999, pp. 67-102. doi:10.1007/978-94-011-4411-7_3
[11]	P. B. Clark and R. MacDonald, “Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEER’s and FEER’s,” IMF Working Paper WP/98/67, International Monetary Fund, Washington DC, May 1998
[12]	A. Bouveret, “BEER Hunter: The Use and Misuse of Behavioral Equilibrium Exchange Rates”, Mimeo, Observatoire Fran?ais des Conjonctures Economiques, Paris, April 2010.
[13]	P. B. Clark and R. MacDonald, “Filtering the BEER: A Permanent and Transitory De-composition,” IMF Working Paper WP/00/144, International Monetary Fund, Washington DC, August 2000.
[14]	P. Dias and R. MacDonald, “BEER Estimates and Target Current Ac-count Imbalances,” Mimeo, Peterson Institute of International Economics, Washington DC, March 2007.
[15]	N. Giannellis and M. Koukouritakis, “Behavioral Equilibrium Exchange Rate and Total Misallignment: Evidence from the Euro Exchange Rate,” Empirica, Vol. 38, No. 4, 2011, pp. 555-578. doi:10.1007/s10663-010-9146-z
[16]	R. MacDonald, “What Determines Real Exchange Rates? The Long And Short Of It,” Journal of International Financial Markets, Institutions and Money, Vol. 8, No. 2, 1997, pp. 117-153. doi:10.1016/S1042-4431(98)00028-6
[17]	R. MacDonald, “Exchange Rates: Do Fundamentals Matter?” Economic Journal, Vol. 109, No. 459, 1999, pp. F673-F691. doi:10.1111/1468-0297.00479
[18]	R. MacDonald, “Concepts to Calculate Equilibrium Exchange Rates: An Overview,” Dis-cussion Paper 300, Economic Research Group of the Deutsche Bundesbank, Frankfurt, July 2000.
[19]	F. Maeso-Fernandez, C. Osbat and B. Snatz, “Determinants of The Euro Real Effective Exchange Rate,” Working Paper No. 85, European Central Bank, Frankfurt, November 2001
[20]	C. Osbat, R. Rueffer and B. Schnatz, “The Rise of the Yen Vis a Vis the (‘Synthetic’) Euro: Is It Supported by Economic Fundamentals?” Working Paper No. 224, European Central Bank, Frankfurt, April 2003
[21]	J. Frenkel and M. Mussa, “Asset Markets, Exchange Rates and the Balance of Payments,” In E. Grossman and K. Rogoff, Eds., Handbook of International Economics, Vol. 2, North Holland, Amsterdam, 1986, pp. 679-747.