Wednesday, October 28, 2015

Sterling-Euro exchange rates

Simon Wren-Lewis calculated the equilibrium exchange rate between the Euro and Pound back in 2003:
When I calculated an equilibrium sterling euro rate in 2003, my estimate was 1.365 E/£.
which corresponds to 0.73 £/€. Which is completely consistent with the information transfer model result:


We both expect a return to a slightly lower value (for €/£, a higher value for £/€). In the ITM it's part of the long run trend of the relative size of the two economies. Wren-Lewis's reasoning is a bit more complicated.

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.