25 Years IWH

Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis

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.

01. February 2016

Authors Makram El-Shagi Axel Lindner Gregor von Schweinitz

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