The Determinants of the Euro-Dollar Exchange Rate - Synthetic Fundamentals and a Non-Existing Currency

Deutsche Bundesbank Working Paper No. 02/00

34 Pages Posted: 13 Jul 2000

See all articles by Jörg Clostermann

Jörg Clostermann

University of Applied Sciences Ingolstadt

Bernd Schnatz

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2000

Abstract

At the beginning of 1999 the euro was launched as a common currency in 11 European countries. This paper addresses empirically the medium to long-term forces driving the real euro-dollar exchange rate. Constructing a synthetic euro-dollar exchange rate over a period from 1975 to 1998 and applying cointegration approaches, four factors are identified as fundamental determinants of the real euro-dollar exchange rate: the international real interest rate differential, relative prices in the traded and non-traded goods sectors, the real oil price and the relative fiscal position. A single equation error correction model outperforms multivariate models and seems to be best suited to analyse and forecast the behaviour of the euro-dollar exchange rate in the medium-term perspective. If this model is applied to the current developments in foreign exchange markets, the external value of the euro appears to be rather low in the winter of 1999/2000.

JEL Classification: F31, F47

Suggested Citation

Clostermann, Jörg and Schnatz, Bernd, The Determinants of the Euro-Dollar Exchange Rate - Synthetic Fundamentals and a Non-Existing Currency (May 2000). Deutsche Bundesbank Working Paper No. 02/00. Available at SSRN: https://ssrn.com/abstract=229472 or http://dx.doi.org/10.2139/ssrn.229472

Jörg Clostermann

University of Applied Sciences Ingolstadt ( email )

Esplanade 10
Ingolstadt, D-85049
Germany
++49-841-9348-122 (Phone)
++49-841-9348-339 (Fax)

Bernd Schnatz (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
069-1344-6517 (Phone)

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