The Eurozone’s Equilibrium Real Exchange Rates

Abstract

The equilibrium real exchange rate is the one of the key concepts in the macroeconomic and policy analysis. The importance of this concept yet increases in a currency union. In general, the real exchange rate misalignments are perceived to be the causes of the loss of a competitiveness, growth slowdowns and currency crises in cases of overvaluation, overheating and inflation in cases of undervaluation, sectoral misallocations of resources and global economic imbalances. In a case of a currency union the divergent dynamics of real effective exchange rates in the individual countries-both the actual and an equilibrium-will exacerbate both economic and political tensions (in addition to above mentioned problems) and may lead to the collapse of not only the monetary union per se but the underlying integration processes as well. This paper employs the estimation of the BEER (behavioral equilibrium exchange rate) for the seven Eurozone countries: Germany, France, Italy, Spain, Greece, Portugal and Ireland for the 1999:1-2011:3 period. The purpose is to compare the performance of the Eurozone "powerhouses" (Germany and France) with the countries on the Mediterranean littoral plus Ireland (so called "troubled periphery"). Those estimates are then used to calculate the degree of Euro's misalignment and the magnitude, persistence and the direction of dynamic tendencies within the Eurozone itself.

Eurozone at a Crossroad: Politics Confronts Economics

“…Differences in economic performance between the "North" and "South" are well documented in the publicly available data. Somewhat different strain of the analysis addresses the dynamics of the equilibrium values of the policy related variables (Rusek (2012b), Darvas and Merler, 2013). The conclusion here is not only that the equilibrium values for the variables like the real exchange rate and the nominal interest rate differ from country to country, but (perhaps more importantly) that the dynamic differences can be identified between the "North" and the "South".…”

Türk Lirası Reel Kuru Denge Değerinde Mi

“…Potansiyel milli gelir hesaplansa bile bir ekonominin tam istihdam seviyesine ve sıfır (veya hedef, sürdürülebilir) cari açık durumuna aynı anda ulaşması gerçekçi bulunmamaktadır (Rusek,2012). FEER genellikle eş anlı denklem sistemleri ile tahmin edilmeye çalışıldığından veri kısıtlarıyla da sıklıkla karşılaşılmaktadır (Rusek, 2012).…”

Relevance of Exchange Rates on the Trade Imbalance in the Eurozone

“…But estimating an equilibrium exchange rate to avoid divergent rates is complicated by the structural change experience at the transition phase as Maeso-Fernandez et al (2006) claims, and by the larger inflation differentials as Honohan and Lane (1999) argue. Rusek (2012) finds that Germany is 20-25% undervalued, suggesting that the equilibrium rate is about $1.60 per Euro while Greece is about 30% overvalued, implying an equilibrium rate of $1.0 per euro.…”