Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis. Issue 1 (26th November 2015)

• Record Type: Journal Article
• Authors: El‐Shagi, Makram; Lindner, Axel; von Schweinitz, Gregor
• Is Part Of: Review of international economics. Volume 24:Issue 1(2016:Feb.)
• Page Start: 37
• Page End: 66
• Publication Date: 2015-11-26
• Subjects: International economic relations -- Periodicals; International finance -- Periodicals; Economic policy -- Periodicals; 330
• DOI: 10.1111/roie.12207
• Languages: English
• ISSNs: 0965-7576

Abstract

Abstract: The European debt crisis has revealed severe imbalances within the Euro area, sparking a debate about the magnitude of those imbalances, in particular concerning real effective exchange rate misalignments. We use synthetic matching to construct a counterfactual economy for each member state in order to identify the degree of these misalignments. We find that crisis countries are best described as a combination of advanced and emerging economies. Comparing the actual real effective exchange rate with those of the counterfactuals gives evidence of misalignments before the outbreak of the crisis: all peripheral countries appear strongly and significantly overvalued.