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Are our FEERs justified?

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  • Barisone, Giacomo
  • Driver, Rebecca L.
  • Wren-Lewis, Simon

Abstract

The Fundamental Equilibrium Exchange Rate (FEER) method of calculating an equilibrium real exchange rate is the most widely used alternative to PPP. This paper presents the first comprehensive historical test of FEER calculations for six major economies, using estimates for the last twenty years. We focus on unit root and cointegration techniques both at the individual country level and jointly using panel based estimation. Specifically, we test whether real exchange rates cointegrate with time series for the FEER with a coefficient of unity, so that the difference between the FEER and the real exchange rate is stationary. Even at an individual country level, the results provide support for the FEER, particularly in Canada, the UK and Germany. Panel unit root tests suggest that the real exchange rate and FEER cointegrate. Overall the results suggest that, with the possible exception of the US, the FEER approach represents an improvement over PPP in explaining medium to long term trends in the real exchange rates of the major industrialised countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 25 (2006)
Issue (Month): 5 (August)
Pages: 741-759

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Handle: RePEc:eee:jimfin:v:25:y:2006:i:5:p:741-759

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Web page: http://www.elsevier.com/locate/inca/30443

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Currency Misalignments and Current Accounts
    by Mainly Macro in Mainly Macro on 2012-08-02 09:30:00
  2. Currency Misalignments and Current Accounts
    by Mainly Macro in Mainly Macro on 2012-08-02 09:30:00
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Cited by:
  1. Jamel Saadaoui, 2011. "Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates," Post-Print halshs-00593674, HAL.
  2. Yizhong Wang, 2010. "The internal and external equilibrium exchange rate of RMB: 1982–2010," Frontiers of Economics in China, Springer, vol. 5(2), pages 210-231, June.
  3. SEKKAT & Patrick PLANE & Ridha NOUIRA, 2011. "Exchange Rate Undervaluation and Manufactured Exports: A Deliberate Strategy?," Working Papers 201125, CERDI.
  4. Vincent Duwicquet & Jacques Mazier & Jamel Saadaoui, 2013. "Désajustements de change, fédéralisme budgétaire et redistribution. Comment s'ajuster en union monétaire," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 57-96.
  5. Georgios E. Chortareas & Rebecca L. Driver, 2001. "PPP and the real exchange rate-real interest rate differential puzzle revisited: evidence from non-stationary panel data," Bank of England working papers 138, Bank of England.
  6. Bénassy-Quéré, Agnès & Lahrèche-Révil, Amina & Mignon, Valérie, 2011. "World-consistent equilibrium exchange rates," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 12-32, June.
  7. Zhibai, Zhang, 2012. "A Simple Model and Its Application in the Valuation of Five Asian Real Exchange Rates," MPRA Paper 40953, University Library of Munich, Germany.
  8. Michael Bleaney & Manuela Francisco, 2010. "What Makes Currencies Volatile? An Empirical Investigation," Open Economies Review, Springer, vol. 21(5), pages 731-750, November.

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