Acta Univ. Agric. Silvic. Mendelianae Brun. 2012, 60(2), 261-270 | DOI: 10.11118/actaun201260020261

On equilibrium real exchange rates in euro area: Special focus on behavioral equilibrium exchange rates in Ireland and Greece

Klára Plecitá1, Luboą Střelec2
1 Ústav financí, Mendelova univerzita v Brně, Zemědělská 1, 613 00 Brno, Česká republika
2 Ústav statistiky a operačního výzkumu, Mendelova univerzita v Brně, Zemědělská 1, 613 00 Brno, Česká republika

This paper focuses on the intra-euro-area imbalances. Therefore the first aim of this paper is to identify euro-area countries exhibiting macroeconomic imbalances. The subsequent aim is to estimate equilibrium real exchange rates for these countries and to compute their degrees of real exchange rate misalignment. The intra-area balance is assessed using the Cluster Analysis and the Principle Component Analysis; on this basis Greece and Ireland are selected as the two euro-area countries with largest imbalances in 2010. Further the medium-run equilibrium exchange rates for Greece and Ireland are estimated applying the Behavioral Equilibrium Exchange Rate (BEER) approach popularised by Clark and MacDonald (1998). In addition, the long-run equilibrium exchange rates are estimated using the Permanent Equilibrium Exchange Rate (PEER) model. Employing the BEER and PEER approaches on quarterly time series of real effective exchange rates (REER) from 1997: Q1 to 2010: Q4 we identify an undervaluation of the Greek and Irish REER around their entrance to the euro area. For the rest of the period analysed their REER is broadly in line with estimated BEER and PEER levels.

Keywords: equilibrium exchange rate, BEER, PEER, macroeconomic balance, Ireland, Greece, Euro area, cluster analysis, principal component analysis
Grants and funding:

This paper is a part of outputs of research intention supported by the Ministry of Education, Youth and Sports of the Czech Republic (Project No. MSM 6215648904/01).

Received: November 30, 2011; Published: October 3, 2013  Show citation

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Plecitá, K., & Střelec, L. (2012). On equilibrium real exchange rates in euro area: Special focus on behavioral equilibrium exchange rates in Ireland and Greece. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 60(2), 261-270. doi: 10.11118/actaun201260020261
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