The Balassa-Samuelson Effect and The MEVA G10 FX Model

Abstract: In this study, we introduce Danske’s Medium Term FX Evaluation model (MEVA G10 FX), a framework that falls within the class of the Behavioural Equilibrium Exchange Rate (BEER) models. An important concept of the BEER model is that there is no prior theory for the choice of economic variables; hence, the choice of variables is based on economic intuition and data simplicity and availability.

Using two medium-term G10 FX drivers – a gauge of the Balassa-Samuelson effect and the terms of trade – we run a Fixed-Effect panel regression on the G10 currencies, using the US Dollar and the Euro as the base currencies.

PDF LINK ===========================> MEVA G10

EXCEL DATA LINK ====================> MENA FX – Quarterly Data

EXCEL (BALASSA – SAMUELSON) DATA ===> PennEffect

Results of our study (FX Q1 2018 spot rates were from mid-february) 

One thought on “The Balassa-Samuelson Effect and The MEVA G10 FX Model

  1. Great model, quick question:

    Noticed you use the real exchange rate in the regression. Doesn’t this feel almost like a plug? as the real exchange rate directly references the y variable that we are trying to forecast against…

    Including / excluding the real exchange rate leads to dramatically different results and additionally the coefficient on the real exchange rate is also very very high, causing a large skew.

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