The dynamics of the real exchange rates in Europe: a comparative study across countries using fractional integration

Abstract

The annual structure of the real exchange rates in sixteen European countries is examined in this article by means of fractional integration techniques. The results show that the highest degree of dependence between the observations is obtained for countries Finland or Spain whereas Switzerland and the UK present the smallest orders of integration. Thus, stronger policy actions are required in the former countries to bring the variables back to their original levels.

Acknowledgements

The author gratefully acknowledges financial support from the Government of Navarra (Ayudas de Formación e Investigación y Desarrollo).

Notes

¹ The disturbances u _t can also be a stationary AR process but in such a context, the parameter d might be distorted because of the competition with the fractional parameter d in describing the nonstationarity.

² These conditions are very mild regarding technical assumptions which are satisfied by Model 2.