The Euro-Dollar Exchange Rate : A Long Term Perspective

We propose a specification of the euro/dollar real exchange rate based on the productivity differential, the governments spending differential and the real interest rate differential. This model suitably describes the euro/dollar path over the last two decades and presents satisfactory forecasting abilities, even after taking account of some econometric problems on the basis of the bootstrap method. Over the recent period, these results seem to hold for the 1999 year but the model fails in 2000, essentially because of the relax of the traditional link between the exchange rate and the interest rate differential, leading us to conclude to a 15% undervaluation of the euro in June 2000