The Beveridge-Nelson (BN) technique provides a forecast-based method of decomposing a variable into trend and cycle when the variable is I(1). In this paper, we use the multivariate version of the BN decomposition proposed by Evans and Reichlin (1994), to identify the trend component of the peseta/deutsche mark, peseta/french franc and peseta/US dollar real exchange rate. We carry out the multivariate decomposition by combining information contained in the real exchange rate with the information provided by variables that are causally related to it and among themselves. Our analysis identifies the overvaluation and undervaluation periods of the peseta with respect to the three currencies between 1972.01 and 1997.09. Finally, it indicates that the real exchange rate is currently undervalued, which calls for higher inflation in Spain than in Germany and France during the first years of the Euro period.

Keywords: real exchange rate, trends and cycles, multivariate Beveridge-Nelson decomposition, VAR models, cointegration, ECM models, long-run equilibrium.
JEL classification: C32, F31.