Revisiting the effective exchange rates of the euro

Abstract

This paper discusses in detail methodological issues in the construction of nominal and real effective exchange rate indicators based on the methodology used by the European Central Bank (ECB). Taking economic theory and data constraints into account, it presents the options available for constructing nominal and real effective exchange rates and describes how this is implemented in practice based on the example of the euro. In particular, the paper discusses the use and development of trade weights based on trade in manufactured goods(taking account of third market effects), the selection of trading partners, and the choice of deflators for constructing real effective exchange rate indices. It also describes how the concept of real effective exchange rates of the euro can be extended to consistent harmonised measures of competitiveness of euro area Member States. It finally shows how the available indicators can be applied in analysing exchange rate and competitiveness developments of the euro area as a whole or individual Member States.

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