Global Equilibrium Exchange Rates: Euro, Dollar, 'Ins', 'Outs', and Other Major Currencies in a Panel Cointegration Framework

43 Pages Posted: 14 Feb 2006

See all articles by Enrique Alberola

Enrique Alberola

Bank for International Settlements (BIS)

Humberto Lopez

World Bank - Research Department

Angel J. Ubide

Tudor Investment Corporation

Susana G. Cervero

affiliation not provided to SSRN

Date Written: December 1999

Abstract

This paper presents a methodology for calculating bilateral equilibrium exchange rates for a panel of currencies in a way that guarantees global consistency. The methodology has three parts: a theoretical model that encompasses the balance of payments and the Balassa-Samuelson approaches to real exchange rate determination; an unobserved components decomposition in a cointegration framework that identifies a time-varying equilibrium real exchange rate; and an algebraic transformation that extracts bilateral equilibrium nominal rates. The results uncover that, by the start of Stage III of the European Economic and Monetary Union (EMU), the euro was significantly undervalued against the dollar and the pound, but overvalued against the yen. The paper also shows that the four major EMU currencies locked their parities with the euro at a rate close to equilibrium.

Keywords: Equilibrium Exchange Rates, Panel Cointegration

JEL Classification: F31, F41, C23

Suggested Citation

Alberola, Enrique and Lopez, Humberto and Ubide-Querol, Angel J. and Garcia Cervero, Susana, Global Equilibrium Exchange Rates: Euro, Dollar, 'Ins', 'Outs', and Other Major Currencies in a Panel Cointegration Framework (December 1999). IMF Working Paper, Vol. , pp. 1-43, 1999. Available at SSRN: https://ssrn.com/abstract=880830

Enrique Alberola (Contact Author)

Bank for International Settlements (BIS) ( email )

Ruben Dario 281
Polanco, Miguel Hidalgo
Mexico City, 11580
Mexico

HOME PAGE: http://www.bis.org/author/enrique_alberola-ila.htm

Humberto Lopez

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Angel J. Ubide-Querol

Tudor Investment Corporation ( email )

800 Connecticut Avenue, Suite 810
Washington, DC 20006
United States
1-202-833 4100 (Phone)
1-202-833 4104 (Fax)

Susana Garcia Cervero

affiliation not provided to SSRN

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