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Measuring the dollar-euro permanent equilibrium exchange rate using the unobserved components model

Chen, X.; MacDonald, R.

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Authors

R. MacDonald



Abstract

This paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the Euro–Dollar permanent equilibrium exchange rates (PEER) for the period 1975Q1 to 2008Q4. The results show that for most of the sample period, the Euro–Dollar exchange rate closely followed the values implied by the PEER. The only significant deviations from the PEER occurred in the years immediately before and after the introduction of the single European currency. The forecasting exercise shows that incorporating economic fundamentals provides a better long-run exchange rate forecasting performance than a random walk process.

Citation

Chen, X., & MacDonald, R. (2015). Measuring the dollar-euro permanent equilibrium exchange rate using the unobserved components model. Journal of International Money and Finance, 53, 20-35. https://doi.org/10.1016/j.jimonfin.2014.12.008

Journal Article Type Article
Online Publication Date Jan 8, 2015
Publication Date May 1, 2015
Deposit Date Feb 20, 2015
Publicly Available Date Mar 28, 2024
Journal Journal of International Money and Finance
Print ISSN 0261-5606
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 53
Pages 20-35
DOI https://doi.org/10.1016/j.jimonfin.2014.12.008
Keywords Permanent equilibrium exchange rate, Unobserved components model, Exchange rate forecasting.
Public URL https://durham-repository.worktribe.com/output/1414515

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Copyright Statement
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Money and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Money and Finance, 53, May 2015, 10.1016/j.jimonfin.2014.12.008.




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