Real Exchange Rate Misalignments in the Euro Area

56 Pages Posted: 10 Nov 2017

See all articles by Michael Fidora

Michael Fidora

European Central Bank (ECB)

Claire Giordano

Bank of Italy

Martin Schmitz

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2017

Abstract

Building upon a Behavioural Equilibrium Exchange Rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and the persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals are affected by the adoption of a single currency. While real misalignments are found to be smaller in the euro area than in its main trading partners, they are also more persistent, although the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased, after the global financial crisis. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities.

Keywords: Real Effective Exchange Rate, Equilibrium Exchange Rate, Monetary Union, Regulation

JEL Classification: E24, E30, F00

Suggested Citation

Fidora, Michael and Giordano, Claire and Schmitz, Martin, Real Exchange Rate Misalignments in the Euro Area (November 7, 2017). ECB Working Paper No. 2108. Available at SSRN: https://ssrn.com/abstract=3067278

Michael Fidora (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 5713 (Phone)

Claire Giordano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Martin Schmitz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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