I am running a BEER model (Behavioral Equilibrium Exchange Rate Model) and using VAR/VECM and Johansen method to estimate the equation. For context, I am looking at the XR of Czech crown and the euro.

The equation takes the following form: $RER=b_1*TS_1+b_2*TS_2+b_3∗TS_3+b_4∗TS_4$, where RER is the real exchange rate (nominal rate adjusted for price levels) and $TS_i$ are the relevant time series determinants.

The goal is to get Behavioral Equilibrium Exchange Rate - a variable/time series that does not appear in the equation. When I run co-integration analysis and use VAR/VECM model, how do I get the BEER time series? In all relevant literature I have read, this step is essentially skipped and results are shown.

Understanding check: the $b_i$ values are given by the co-integration vector? Correct?

TL;DR: How do I get what I am trying to estimate when it doesn't even appear in the equation?


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.