Abstract:
Building upon a Behavioural Equilibrium Exchange Rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and the persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals are affected by the adoption of a single currency. While real misalignments are found to be smaller in the euro area than in its main trading partners, they are also more persistent, although the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased, after the global financial crisis. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities.
