Internal and External Exchange Rate Equilibrium in a Cointegration Framework. An Application to the Spanish Peseta.

A simple method to estimate multilateral equilibrium real exchange rates in a cointegration framework is used to compute the equilibrium real exchange rate for the peseta. The stock of foreign assets and the evolution of sectoral prices have been considered to be the fundamentals for the real exchange rate. After testing for cointegration among the three variables, we proceed to decompose the series in a permanent and a transitory component, following the method devised by Gonzalo and Granger.