Filtering the Beer: A Permanent and Transitory Decomposition

By Peter B. Clark, Ronald R. MacDonald. Social Science Research Network, 2000

177 citations recorded by the source corpus.

In this paper we extend the BEER (Behavioral Equilibrium Exchange Rate) approach which identifies an estimated equilibrium relationship between the real exchange rate and economic fundamentals. Here the economic fundamentals are decomposed using Johansen cointegration methods into transitory and permanent components, with the latter used to estimate the Permanent Equilibrium Exchange Rate, or PEER, for the U.S. and Canadian dollars and the pound sterling. The BEER and the PEER move closely together for the U.S. and Canadian dollars and generally track the actual exchange rate. By contrast, for the pound sterling the BEER and the PEER diverge sharply, with the latter following the actual exchange rate quite closely.

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Citations in the corpus

• The Equilibrium Real Exchange Rate in a Commodity Exporting Country: Algeria's Experience (2005, background): “Clark and MacDonald (2000) extended the approach to better differentiate between permanent and transitory components of the real exchange rate.”
• Concepts of equilibrium exchange rates (2005, background): “(55) Clark and MacDonald (2000) suggest that in some cases it may be important to concentrate simply on the role of fundamentals, in order to understand the impact of the real interest rate differential.”
• Just How Undervalued is the Chinese Renminbi (2005, unknown): “Clark and MacDonald (2000) focus on the exchange rates of the United States, Canada and the United Kingdom.”