Filtering the Beer: A Permanent and Transitory Decomposition
August 1, 2000
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Summary
In this paper we extend the BEER (Behavioral Equilibrium Exchange Rate) approach which identifies an estimated equilibrium relationship between the real exchange rate and economic fundamentals. Here the economic fundamentals are decomposed using Johansen cointegration methods into transitory and permanent components, with the latter used to estimate the Permanent Equilibrium Exchange Rate, or PEER, for the U.S. and Canadian dollars and the pound sterling. The BEER and the PEER move closely together for the U.S. and Canadian dollars and generally track the actual exchange rate. By contrast, for the pound sterling the BEER and the PEER diverge sharply, with the latter following the actual exchange rate quite closely.
Subject: Currencies, Exchange rates, Financial services, Foreign exchange, Money, Real effective exchange rates, Real exchange rates, Real interest rates
Keywords: BEER approach, Currencies, equilibrium exchange rate, equilibrium exchange rates, exchange rate disequilibrium, Exchange rates, interest differential, Real effective exchange rates, Real exchange rates, real interest rate, Real interest rates, U.K. BEER, U.K. pound, U.S. dollar, WP
Pages:
38
Volume:
2000
DOI:
Issue:
144
Series:
Working Paper No. 2000/144
Stock No:
WPIEA1442000
ISBN:
9781451856439
ISSN:
1018-5941
