Model Uncertainty and the Equilibrium Value of the Real Effective Euro Exchange Rate

52 Pages Posted: 27 Apr 2003

See all articles by Carsten Detken

Carsten Detken

European Central Bank (ECB)

Alistair Dieppe

World Bank

Jerome Henry

European Central Bank (ECB)

Carmen Marin

Universidad de Murcia

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Date Written: July 2002

Abstract

On the basis of historical data aggregated over the period 1973 to 2000, we estimated four different equilibrium exchange rate models for the synthetic euro. Using the same data set, variable definitions and sample period offers the possibility to assess the uncertainty surrounding such equilibrium levels, both from a statistical and a theoretical perspective. We employed reduced form co-integration models, a structural VAR, a Natrex model (estimated in structural form) and the ECB's small-sized euro area wide macro-economic model. In this order the approaches feature an increasing degree of "structure," in the sense of the constraints based on economic theory embedded in the econometric models that were estimated. The results confirm the high likelihood for the euro having been undervalued in Q4 2000, while stressing the significant empirical and theoretical uncertainty with respect to the equilibrium exchange rate level.

Keywords: Equilibrium exchange rate, euro, model uncertainty

JEL Classification: F31, F32

Suggested Citation

Detken, Carsten and Dieppe, Alistair and Henry, Jerome and Marin, Carmen and Smets, Frank, Model Uncertainty and the Equilibrium Value of the Real Effective Euro Exchange Rate (July 2002). ECB Working Paper No. 160, Available at SSRN: https://ssrn.com/abstract=358002

Carsten Detken (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

Alistair Dieppe

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Jerome Henry

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7614 (Phone)
+49 69 1344 6575 (Fax)

Carmen Marin

Universidad de Murcia ( email )

Avda Teniente Flomesta, 5
Murcia, Murcia 30100
Spain

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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