Determinants of the Effective Real Exchange Rate of the Synthetic Euro: Alternative Methodological Approaches

33 Pages Posted: 13 Jan 2003

See all articles by Carsten Detken

Carsten Detken

European Central Bank (ECB)

Alistair Dieppe

World Bank

Jerome Henry

European Central Bank (ECB)

Frank Smets

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

Carmen Marin

Universidad de Murcia

Abstract

On the basis of historical data aggregated over the period 1973 to 2000, we have experimented with four different approaches to estimate the synthetic euro's equilibrium exchange rate. Using a number of competing models with the same data set, variable definitions and sample period offers the possibility to assess the uncertainty surrounding such equilibrium levels, both from an empirical (different estimates) and a theoretical viewpoint (different specifications). In this exercise, the "Rest of the World" is proxied by the US, the UK, Japan and Switzerland, aggregated on the basis of trade weights.

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-econometric 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.

Suggested Citation

Detken, Carsten and Dieppe, Alistair and Henry, Jerome and Smets, Frank and Marin, Carmen, Determinants of the Effective Real Exchange Rate of the Synthetic Euro: Alternative Methodological Approaches. Australian Economic Papers, Vol. 41, pp. 404-436, 2002, Available at SSRN: https://ssrn.com/abstract=368505

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)

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

Carmen Marin

Universidad de Murcia ( email )

Avda Teniente Flomesta, 5
Murcia, Murcia 30100
Spain

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