The equilibrium real exchange rate of the Euro : an evaluation of research

We evaluate studies of the "equilibrium" value of the real euro. We ask: how can one explain the medium to longer run movements in the synthetic Euro? We compare the results derived from a statistical/atheoretic approach with those based upon a theoretical stock/flow/growth model with an explicit transmission mechanism. Conclusions: there are real fundamental factors - productivity, thrift and the terms of trade - that explain the longer term movements in the equilibrium real exchange rate of the synthetic euro within a consistent theoretical framework. Uncovered real long term interest rate parity helps to explain deviations from the longer term equilibrium. There is a considerable model uncertainty. The quantitative estimates vary depending upon the method of estimation.