Filtering the Beer: A Permanent and Transitory Decomposition

38 Pages Posted: 31 Jan 2006

See all articles by Peter B. Clark

Peter B. Clark

International Monetary Fund (IMF)

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2000

Abstract

In this paper we extend the BEER (Behavioral Equilibrium Exchange Rate) approach which identifies an estimated equilibrium relationship between the real exchange rate and economic fundamentals. Here the economic fundamentals are decomposed using Johansen cointegration methods into transitory and permanent components, with the latter used to estimate the Permanent Equilibrium Exchange Rate, or PEER, for the U.S. and Canadian dollars and the pound sterling. The BEER and the PEER move closely together for the U.S. and Canadian dollars and generally track the actual exchange rate. By contrast, for the pound sterling the BEER and the PEER diverge sharply, with the latter following the actual exchange rate quite closely.

Keywords: Real exchange rates, equilibrium exchange rates

JEL Classification: F31, F32, F41

Suggested Citation

Clark, Peter B. and MacDonald, Ronald R., Filtering the Beer: A Permanent and Transitory Decomposition (August 2000). Available at SSRN: https://ssrn.com/abstract=879943 or http://dx.doi.org/10.2139/ssrn.879943

Peter B. Clark (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Ronald R. MacDonald

University of Strathclyde in Glasgow - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 141 548 3861 (Phone)

Government of New Zealand - Department of Economics

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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