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) 

Behavioural Equilibrium Exchange Rate (BEER) model

Abstract: In this article, we introduce another method for evaluating the ‘fair’ value of a currency: the Behavioural Equilibrium Exchange Rate (BEER), a model which is widely used in practice. The BEER model was developed by Clark and MacDonald (1999) and estimates the fair value of currencies according to short, medium and long-run determinants. An important concept 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.

We also do an application of the BEER and run a Fixed-Effect panel regression on the G10 currencies, using the US Dollar as the base currency, and three widely used macroeconomic variables – inflation, terms-of-trade and interest rates – for our regression. We conclude by commenting the results and making a brief analysis on the Euro (Spot rate versus BEER value).

 LINK ===> BEER_Models

Excel Data ===> Data BEER_New