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

Chen, X. and MacDonald, R. (2015) 'Measuring the dollar–euro permanent equilibrium exchange rate using the unobserved components model.', Journal of international money and finance., 53 . pp. 20-35.


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.

Item Type:Article
Keywords:Permanent equilibrium exchange rate, Unobserved components model, Exchange rate forecasting.
Full text:(AM) Accepted Manuscript
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Publisher 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.
Date accepted:No date available
Date deposited:24 February 2015
Date of first online publication:08 January 2015
Date first made open access:08 July 2016

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