Theory and practice of equilibrium real exchange rates. looking into the euro-area empirical evidence
The main goal of this PhD memory is the analysis of the real exchange rate behaviour in a medium and long run horizon. With this objective we develop three different research papers on the topic that, presented in different chapters, conform the main body of the job.
In particular, chapter one analyses how the classical answer to the empirical relationship between the economic growth of a country and its long run real exchange rate can be enriched through the consideration of a more general, balanced growth, intertemporal equilibrium model. In this chapter, we consider a simple exogenous growth model where it is imposed the internal, external and intertemporal equilibrium conditions of a typical macroeconomic model; this last one through the inclusion of a balanced growth path for the foreign assets accumulation. The main result under this consideration is that the relationship defended by the Balassa-Samuelson hypothesis is no more so straightforward. In our particular approach, the mentioned bilateral relationship depends on a parameter measuring thriftiness in the economy. Therefore, the probability of ending up with a positive relationship between growth and real exchange rates as the classical economic theory predicts will be higher when the economy is able to maintain a minimum saving ratio. Moreover, given that our model considers a simple Keynesian consumption function, some explosive paths can be possible.
Chapter two gives a step forward and, following a general equilibrium macroeconomic approach, sets a closed micro-founded structural model to determine the long run real exchange rate of a developed economy. In particular, the analysis follows the structure of a Natrex model. The main contribution of this second chapter is the development of a solid theoretical framework that analyse in depth the basis of the real exchange rate and the details of the equilibrium dynamics after any shock influencing the steady state. In our case, the intertemporal factors derived from the stock-flow relationship will be particularly determinant. The main results of the chapter can be summarised as follows. In first place, a complete well-integrated structural model for long-run real exchange rate determination is developed from first principles. Moreover, within the concrete dynamics of the model, it is found that some convergence restrictions will be necessary. On one hand, for the medium run convergence the sensitivity of the trade balance to changes in real exchange rate should be higher that the correspondent one to the investment decisions. On the other hand, and regarding long-run convergence, it is also necessary both that there exists a negative relationship between investment and capital stock accumulation and that the global saving of the economy depends positively on net foreign debt accumulation. In addition, there are also interesting conclusions about the effects that certain shocks over the exogenous variables of the model have on real exchange rates.
Finally chapter three uses the previous theoretical model to check its performance in the particular case of the euro. Its contribution is two-fold. First of all, the Natrex model is estimated in its true structural form. So far the Natrex models had only been estimated in reduced forms or semi-reduced forms. Secondly, the model is applied to the effective euro exchange rate -period going from 1970 to 2000- using quarterly observations from the database of the ECBs area wide model (AWM). We thus contribute to the growing literature on the euros fundamental value by using one of the more comprehensive databases for pre-Stage III euro area data available so far. According to our structural model we can conclude about the main periods of over and undervaluation of the euro, being particularly interesting the significant undervaluation obtained at the end of the period under analysis.
Advisor:Raymon Bara, J.L.; García Solanes, J.
School:Universitat Autónoma de Barcelona
Source Type:Master's Thesis
Keywords:412 departament d economia i historia economica
Date of Publication:12/09/2003