Article

 

Test of a V-Shaped Relationship between the Expected Real Effective Exchange Rate and Real Output: The Case of France (p.11-22)

by

Yu Hsing, Southeastern Louisiana University

Keywords : MPRF, UIP, Expected real depreciation or appreciation, Government debt, World interest rate, Expected inflation

JEL classification : F41, F31

Abstract

Applying a simultaneous equation model incorporating the monetary policy reaction function and the interactive dummy variable technique, this paper finds that real GDP and the expected real effective exchange rate exhibit a V-shaped relationship, suggesting that expected real depreciation raises real output during early years whereas expected real appreciation increases real output in recent years. Hence, recent real appreciation of the euro would work in favor of France. Other findings are that a higher government debt ratio, a higher real stock price, a higher real EU interest rate, and a lower expected inflation rate would increase real output for France.