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Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates

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  • Jamel Saadaoui

    ()
    (University of Paris North)

Abstract

The paper investigates if the most popular alternative to the purchasing parity power approach (PPP) to estimate equilibrium exchange rates, the fundamental equilibrium exchange rate (FEER) influences exchange rate dynamics in the long run. For a large panel of industrialized and emerging countries and on the period 1982-2007, we detect the presence of unit roots in the series of real effective exchange rates and in the series of FEERs. We find and estimate a cointegration relationship between real effective exchange rates and FEERs. The results show that the FEER has a positive and significant influence on exchange rate dynamics in the long run.

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File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P180.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 3 ()
Pages: 1993-2005

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Handle: RePEc:ebl:ecbull:eb-11-00033

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Related research

Keywords: Fundamental equilibrium exchange rates; Panel unit root tests; Global imbalances; Fully modified ordinary least square; Dynamic ordinary least square;

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References

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  1. Se-Eun Jeong & Jacques Mazier, 2003. "Exchange Rate Regimes and Equilibrium Exchange Rates in East Asia," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 0-0.
  2. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  3. Nabil Aflouk & Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments and International Imbalances a FEER Approach for Emerging Countries," Economie Internationale, CEPII research center, issue 124, pages 31-74.
  4. William R. Cline, 2008. "Estimating Consistent Fundamental Equilibrium Exchange Rates," Working Paper Series WP08-6, Peterson Institute for International Economics.
  5. Su Zhou, 1993. "Fundamental equilibrium exchange rates and exchange rate dynamics," Open Economies Review, Springer, vol. 4(2), pages 189-209, June.
  6. Martin S. Feldstein, 2011. "The Role of Currency Realignments in Eliminating the US and China Current Account Imbalances," NBER Working Papers 16674, National Bureau of Economic Research, Inc.
  7. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
  8. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
  9. Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments at World and European Levels: a FEER Approach," Economie Internationale, CEPII research center, issue 121, pages 25-58.
  10. Joseph E. Gagnon, 2011. "Current Account Imbalances Coming Back," Working Paper Series WP11-1, Peterson Institute for International Economics.
  11. Barisone, G. & Driver, R.L. & Wren-Lewis, S., 2000. "Are Our FEERs Justified?," Discussion Papers 0002, Exeter University, Department of Economics.
  12. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  13. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  14. Didier Borowski & Cecile Couharde, 2003. "The Exchange Rate Macroeconomic Balance Approach: New Methodology and Results for the Euro, the Dollar, the Yen and the Pound Sterling," Open Economies Review, Springer, vol. 14(2), pages 169-190, April.
  15. William R. Cline & John Williamson, 2011. "Estimates of Fundamental Equilibrium Exchange Rates, May 2011," Policy Briefs PB11-5, Peterson Institute for International Economics.
  16. Damiaan Persyn & Joakim Westerlund, 2008. "Error-correction–based cointegration tests for panel data," Stata Journal, StataCorp LP, vol. 8(2), pages 232-241, June.
  17. Martin, Feldstein, 2011. "The role of currency realignments in eliminating the US and China current account imbalances," Journal of Policy Modeling, Elsevier, vol. 33(5), pages 731-736, September.
  18. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  19. William R. Cline & John Williamson, 2010. "Currency Wars?," Policy Briefs PB10-26, Peterson Institute for International Economics.
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Citations

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Cited by:
  1. Duwicquet, Vincent & Mazier, Jacques & Saadaoui, Jamel, 2012. "Exchange Rate Misalignments, Fiscal Federalism and Redistribution: How to Adjust in a Monetary Union," MPRA Paper 48697, University Library of Munich, Germany.
  2. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
    [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
    ," MPRA Paper 51332, University Library of Munich, Germany.
  3. Vincent Duwicquet & Jacques Mazier & Jamel Saadaoui, 2012. "Désajustements de change, fédéralisme budgétaire et redistribution : comment s'ajuster en union monétaire," CEPN Working Papers halshs-00735142, HAL.
  4. Saadaoui, Jamel, 2012. "Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates?," MPRA Paper 42554, University Library of Munich, Germany.
  5. Jamel Saadaoui & Jacques Mazier & Nabil Aflouk, 2013. "On the determinants of exchange rate misalignments," Applied Economics Letters, Taylor & Francis Journals, vol. 20(18), pages 1608-1610, December.
  6. Jamel Saadaoui, 2012. "Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates?," Working Papers halshs-00750551, HAL.
  7. Jamel Saadaoui & Jacques Mazier & Nabil Aflouk, 2013. "On the Determinants of Exchange Rate Misalignments," Working Papers halshs-00829460, HAL.

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