Real Exchange Rate Misalignments in the Euro Area

Building upon a Behavioural Equilibrium Exchange Rate model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses both the size and the persistence of real effective exchange rate misalignments of countries that have adopted the euro and of those outsi...

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Bibliographic Details
Published in:Open economies review 2021-02, Vol.32 (1), p.71-107
Main Authors: Fidora, Michael, Giordano, Claire, Schmitz, Martin
Format: Article
Language:English
Subjects:
Currency
Development Economics
Economic crisis
Economic Policy
Economics
Economics and Finance
Euro
European Integration
Eurozone
Foreign exchange rates
International Economics
Macroeconomics/Monetary Economics//Financial Economics
Monetary unions
Research Article
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Summary:Building upon a Behavioural Equilibrium Exchange Rate model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses both the size and the persistence of real effective exchange rate misalignments of countries that have adopted the euro and of those outside the euro area. The euro area is indeed a poignant example of a currency union in which the nominal exchange rate is irrevocably fixed; the non-euro area economies considered include countries with either flexible or pegged currencies. While misalignments are found to be smaller in the euro area than in the rest of the world, they are also more persistent; however, the persistence in the euro area has decreased after the global financial crisis. Finally, it is found that improvements in the quality of institutions – observed in particular after 2009 within the euro area – reduce the persistence of misalignments.
ISSN:0923-7992
1573-708X
DOI:10.1007/s11079-020-09596-1