An Evaluation of the Equilibrium Value of the Euro and Its Predecessors Based on Economic Fundamentals

Document Type

Presentation

Presentation Date

10-20-2016

Abstract or Description

This study presents constructed equilibrium exchange rates (EERs) of the euro and its predecessors the EUA and the ECU, as well as the euro’s member states using a relative version of PPP equilibrium that differs from the traditional real exchange rate. The analysis provides a detailed discussion of the composition of the EUA and the ECU basket as well as how the irrevocable euro conversion rates are obtained. The revealed patterns of over- and undervaluation demonstrate how well suited the northern member states, in contrast to the southern states, were for the monetary union. Moreover, a relative persistent overvaluation for Greece and Portugal suggests that their ambition to join the euro reduced their competitiveness. The constructed EERs of the euro suggest the European Commission was able to set the initial value of the euro with a high degree of accuracy. Furthermore, the EERs indicate a successive strengthening of the fundamental value of the euro versus the US dollar from 1999 to 2015. The analysis shows a close correlation between the deviations from equilibrium and the events of Greece’s sovereign debt crisis. The presented results are robust to different constructed EERs and offer a guide to international market participants interested in the general equilibrium path of the euro and its predecessors.

Sponsorship/Conference/Institution

Financial Management Association Annual Conference (FMA)

Location

Las Vegas, NV

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