Euro-dollar real exchange rate misalignments: Is the euro overvalued?

Abstract

This paper estimates both short term and long run relationship between the real bilateral EUR-USD exchange rate and its real determinants. In the long run, it finds that the non-stationary real exchange rate in levels is linearly co-integrated with real variables. Using an ordinary least squares method with error correction mechanism, it investigates real EUR-USD exchange rate misalignment in the short term. By analysing real variables and their influence on international trade and capital movements, potential economic policies capable of maintaining equilibrium in the balance of payments and avoiding currency overvaluation are considered.