Bernd Schnatz

Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach

This paper presents an empirical analysis of the medium-term determinants of the euro effective exchange rate. The empirical analysis builds on synthetic quarterly data from 1975 to 1998, and derives a Behavioural Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). Four different model specifications are retained, due to the difficulties encountered in specifying an encompassing model. Results indicate that differentials in real interest rates and productivity, and (in some specifications) the relative fiscal stance and the real price of oil, have a significant influence on the euro effective exchange rate. Assessing the existence and the extent of the over- or undervaluation of the exchange rate is not straightforward, since these different specifications often lead to contrasting findings. However, all four models point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen.

The Determinants of the Euro-Dollar Exchange Rate - Synthetic Fundamentals and a Non-Existing Currency

At the beginning of 1999 the euro was launched as a common currency in 11 European countries. This paper addresses empirically the medium to long-term forces driving the real euro-dollar exchange rate. Constructing a synthetic euro-dollar exchange rate over a period from 1975 to 1998 and applying cointegration approaches, four factors are identified as fundamental determinants of the real euro-dollar exchange rate: the international real interest rate differential, relative prices in the traded and non-traded goods sectors, the real oil price and the relative fiscal position. A single equation error correction model outperforms multivariate models and seems to be best suited to analyse and forecast the behaviour of the euro-dollar exchange rate in the medium-term perspective. If this model is applied to the current developments in foreign exchange markets, the external value of the euro appears to be rather low in the winter of 1999/2000.

Productivity and the Euro-Dollar exchange rate

This article analyses the impact of productivity developments in the United States and the euro area on the euro-dollar exchange rate. The article presents a new measure of relative average labour, productivity (ALP) which does not suffer from the biases implicit in readily available relative ALP data. Importantly, the patterns of these series differ widely. Employing the Johansen cointegration framework, four models are estimated using four different productivity proxies. Our results indicate that the extent to which productivity can explain the euro depreciation varies with the productivity proxy used: readily available measures explain most, our new, preferred measure least. In all models, however, productivity can explain only a fraction of the actual euro depreciation experienced in 1999–2000. JEL no. F31, C32, O47

Global Imbalances and the Pretence of Knowing Fundamental Equilibrium Exchange Rates

Global imbalances remain a key challenge for the world economy. In this regard, it has often been argued that insufficient exchange rate adjustment prevents their dissolution. Obviously, such a line of reasoning crucially depends on the methodologies used for assessing the ‘fair value’ of a currency. This paper looks specifically at estimates of fundamental equilibrium exchange rates (FEER) and shows that these are highly sensitive to the chosen assumptions. The present study cautions against using such models too mechanistically and giving too much confidence to the precision of obtained magnitudes of misalignment.

Trade integration of the new EU member states and selected South-East European countries: lessons from a gravity model

The rapid integration of the transition countries of Central and South Eastern Europe with the euro area is one of the most striking developments that affected trade flows in Europe over the past decade. The aim of this paper is to analyse the factors behind this quick integration and to gauge whether this pattern is likely to continue or to slow down in the coming years. For that purpose, we estimate a large gravity model. Furthermore, the issues related to the interpretation of fixed effects are discussed. Overall, the gravity model successfully explains the trade patterns observed in the past ten years. Although our results require a cautious interpretation, they suggest that trade integration between the largest Central and Eastern European countries and the euro area is already relatively advanced, while these countries still have scope to strengthen their trade links with countries in many other parts of the world. Thus, we conclude that market shares of these countries in the euro area are likely to stabilise soon. For the South Eastern European countries, by contrast, there is still ample scope to integrate more into the world economy. * We have benefited from comments by Stelios Makrydakis and Doris Ritzberger-Grünwald. The views expressed in this contribution are those of the authors and do not necessarily represent the position of the European Central Bank or the Oesterreichische Nationalbank. a European Central Bank.

Where are Global and U.S. Trade Heading in the Aftermath of the Trade Collapse: Issues and Alternative Scenarios

Global and U.S. trade declined dramatically in the wake of the global financial crisis in late 2008 and early 2009. The subsequent recovery in trade, while vigorous at first, gradually lost momentum in 2010. Against this backdrop, this paper explores the prospects for global and U.S. trade in the medium term. We develop a unified empirical framework – an error correction model – that exploits the cointegrating relationship between trade and economic activity. The model allows us to juxtapose several scenarios with different assumptions about the strength of GDP growth going forward and the relationship between trade and economic activity. Our analysis suggests that during the crisis both world trade and U.S. exports declined significantly more than would have been expected on the basis of historical relationships with economic activity. Moreover, this gap between actual and equilibrium trade is closing only slowly and could persist for some time to come.