Behavioural Equilibrium Exchange Rate and Total Misalignment: Evidence from the Euro Exchange Rate

This paper investigates whether the nominal euro exchange rate against the currencies of China, Japan, the UK and the USA converges or not to its equilibrium level. Applying cointegration and common trend techniques in the presence of structural breaks in the data, we found a valid long-run relationship between the euro/yuan, euro/yen, euro/UK pound and euro/US dollar nominal exchange rates and the fundamentals defined by the monetary model. Our modified Behavioural Equilibrium Exchange Rate model suggests that at the end of the estimated period, the euro/Chinese yuan and the euro/UK pound exchange rates follow an equilibrium process. On the other hand, the euro is considered as overvalued against the US dollar and as undervalued against the Japanese yen.