Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis

30 Pages Posted: 20 Jan 2016

See all articles by Makram El-Shagi

Makram El-Shagi

Henan University

Axel Lindner

Halle Institute for Economic Research

Gregor von Schweinitz

Halle Institute for Economic Research

Date Written: February 2016

Abstract

The European debt crisis has revealed severe imbalances within the Euro area, sparking a debate about the magnitude of those imbalances, in particular concerning real effective exchange rate misalignments. We use synthetic matching to construct a counterfactual economy for each member state in order to identify the degree of these misalignments. We find that crisis countries are best described as a combination of advanced and emerging economies. Comparing the actual real effective exchange rate with those of the counterfactuals gives evidence of misalignments before the outbreak of the crisis: all peripheral countries appear strongly and significantly overvalued.

Suggested Citation

El-Shagi, Makram and Lindner, Axel and von Schweinitz, Gregor, Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis (February 2016). Review of International Economics, Vol. 24, Issue 1, pp. 37-66, 2016, Available at SSRN: https://ssrn.com/abstract=2718691 or http://dx.doi.org/10.1111/roie.12207

Makram El-Shagi (Contact Author)

Henan University ( email )

85 Minglun St. Shunhe
Kaifeng, Henan 475001
China

Axel Lindner

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Gregor Von Schweinitz

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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