Application of Fundamental Exchange Rate Analysis Approaches to Selected Euro Area Countries: The Cases of Germany and Greece

This bachelor’s thesis focuses on the fundamental approaches to exchange rate analysis, specifically the Purchasing Power Parity (PPP) theory, the Uncovered Interest Rate Parity (UIP) theory, and the Balance of Payments (BoP) approach. These methods are subsequently applied to selected euro area countries, namely Germany and Greece. The main objective of the thesis is to determine whether, based on these approaches, the euro exchange rate is overvalued or undervalued for these countries. The thesis is structured into three parts. The first part provides an overview of the European Monetary Union (EMU) and the euro. The second part outlines the theoretical foundations of fundamental exchange rate analysis. The third, empirical part applies the selected approaches to Germany and Greece and examines the impact of exchange rate misalignments on their respective economies. The UIP theory and the BoP approach consistently identified the euro as undervalued for Germany and overvalued for Greece throughout the observed period. The PPP theory supported this conclusion in the period preceding the financial crisis. The effects of exchange rate misalignment were partially reflected in the development of net exports and in the performance of tradable and non-tradable sectors of the economy.