The equilibrium real exchange rate is the one of the key concepts in the macroeconomic and policy analysis. The importance of this concept yet increases in a currency union. In general, the real exchange rate misalignments are perceived to be the causes of the loss of a competitiveness, growth slowdowns and currency crises in cases of overvaluation, overheating and inflation in cases of undervaluation, sectoral misallocations of resources and global economic imbalances. In a case of a currency union the divergent dynamics of real effective exchange rates in the individual countries-both the actual and an equilibrium-will exacerbate both economic and political tensions (in addition to above mentioned problems) and may lead to the collapse of not only the monetary union per se but the underlying integration processes as well. This paper employs the estimation of the BEER (behavioral equilibrium exchange rate) for the seven Eurozone countries: Germany, France, Italy, Spain, Greece, Portugal and Ireland for the 1999:1-2011:3 period. The purpose is to compare the performance of the Eurozone "powerhouses" (Germany and France) with the countries on the Mediterranean littoral plus Ireland (so called "troubled periphery"). Those estimates are then used to calculate the degree of Euro's misalignment and the magnitude, persistence and the direction of dynamic tendencies within the Eurozone itself.
In a case of a currency union like USDEUR there are divergent dynamics of real effective exchange rates in the individual country and form a new equilibrium REF .
The Eurozone’s Equilibrium Real Exchange Rates
Modern Economy
Economics