Global Equilibrium Exchange Rates: Euro, Dollar, “Ins,” “Outs,” and Other Major Currencies in a Panel Cointegration Framework

By Susana Garcia Cervero, J. Humberto Lopez, Enrique Alberola Ila, Angel J. Ubide

December 1, 1999

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Susana Garcia Cervero, J. Humberto Lopez, Enrique Alberola Ila, and Angel J. Ubide Global Equilibrium Exchange Rates: Euro, Dollar, “Ins,” “Outs,” and Other Major Currencies in a Panel Cointegration Framework, (USA: International Monetary Fund, 1999) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper presents a methodology for calculating bilateral equilibrium exchange rates for a panel of currencies in a way that guarantees global consistency. The methodology has three parts: a theoretical model that encompasses the balance of payments and the Balassa-Samuelson approaches to real exchange rate determination; an unobserved components decomposition in a cointegration framework that identifies a time-varying equilibrium real exchange rate; and an algebraic transformation that extracts bilateral equilibrium nominal rates. The results uncover that, by the start of Stage III of the European Economic and Monetary Union (EMU), the euro was significantly undervalued against the dollar and the pound, but overvalued against the yen. The paper also shows that the four major EMU currencies locked their parities with the euro at a rate close to equilibrium.

Subject: Currencies, Exchange rates, External position, Foreign assets, Foreign exchange, Money, Purchasing power parity, Real exchange rates

Keywords: Currencies, Deviations from equilibrium, Equilibrium exchange rate, Equilibrium Exchange Rates, Excess demand, Exchange rate, Exchange rates, Foreign assets, Global, Panel Cointegration, Purchasing power parity, Real exchange rates, Swedish krona, WP, Yen rate

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/175
Stock No:

WPIEA1751999
ISBN:

9781451858730
ISSN:

1018-5941

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