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

43 Pages Posted: 13 Dec 1999

See all articles by Angel J. Ubide

Angel J. Ubide

Tudor Investment Corporation

Enrique Alberola

Bank for International Settlements (BIS)

Humberto Lopez

World Bank - Research Department

Susana G. Cervero

affiliation not provided to SSRN

Abstract

This paper presents a methodology for the calculation of bilateral equilibrium exchange rates for a panel of currencies in a way that guarantees consistency at the global level. A theoretical model, which encompasses the balance of payments and the Balassa-Samuelson approaches to real exchange rate determination, shows that the stock of net foreing assets and the evolution of sectoral prices are the fundamentals underlying the behavior of the real exchange rate. An unobserved components methodology in a cointegration framework allows us to identify a time-varying equilibrium real exchange rate, and deviations from this equilibrium provide an estimate of the degree of multilateral misalignment. Finally, an algebraic transformation converts these multilateral equilibrium real rates into bilateral equilibrium nominal rates. The results uncover, inter alia, that by the start of Stage III of EMU the euro was significantly undervalued against the dollar and even more against the pound, but overvalued against the yen. Regarding EMU currencies, it is shown that the four major EMU countries locked their parities with the euro at a rate close to equilibrium.

JEL Classification: F31, F41, C23

Suggested Citation

Ubide-Querol, Angel J. and Alberola, Enrique and Lopez, Humberto and Garcia Cervero, Susana, Global Equilibrium Exchange Rates: Euro, Dollar, 'Ins,' 'Outs,' and Other Major Currencies in a Panel Cointegration Framework. Available at SSRN: https://ssrn.com/abstract=199030 or http://dx.doi.org/10.2139/ssrn.199030

Angel J. Ubide-Querol (Contact Author)

Tudor Investment Corporation ( email )

800 Connecticut Avenue, Suite 810
Washington, DC 20006
United States
1-202-833 4100 (Phone)
1-202-833 4104 (Fax)

Enrique Alberola

Bank for International Settlements (BIS) ( email )

Ruben Dario 281
Polanco, Miguel Hidalgo
Mexico City, 11580
Mexico

HOME PAGE: http://www.bis.org/author/enrique_alberola-ila.htm

Humberto Lopez

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Susana Garcia Cervero

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Downloads
365
Abstract Views
2,603
rank
82,345
PlumX Metrics