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Czech BEERs with PEERs: Tackling the Uncertainty

Author

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  • Jaromir Baxa

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic
    The Czech Academy of Sciences, Institute of Information Theory and Automation, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)

  • Pavel Jancovic

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)

Abstract

The alternative specifications of the behavioural equilibrium exchange rate models (the BEERs) and their permanent counterparts (the PEERs) often deliver diverse estimates of the equilibrium exchange rate. In the case of the Czech koruna against the euro exchange rate, the discrepancy among the estimated BEERs often exceeds 10 %, and it had been wide before the introduction of the exchange rate commitment in November 2013 as well. Thus, the BEERs do not provide reliable guidance about the equilibrium exchange rate and the size of the equilibrium. To tackle the model uncertainty, we propose to learn about the BEERs and PEERs from the model combination to retain the information of all individual models. From a policy perspective, our results provide weak support to claims that the Czech koruna had been slightly overvalued before the introduction of the commitment in 2013. However, the koruna became increasingly undervalued since the mid of 2015, and this timing overlaps with the need to support the exchange rate commitment by the exchange rate interventions.

Suggested Citation

  • Jaromir Baxa & Pavel Jancovic, 2019. "Czech BEERs with PEERs: Tackling the Uncertainty," Working Papers IES 2019/30, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2019.
    • Handle: RePEc:fau:wpaper:wp2019_30
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    More about this item

    Keywords

    Equilibrium exchange rate; BEER; PEER; exchange rate commitment; model averaging;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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