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A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation

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  • Menzie Chinn

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Abstract

Several alternative measures of “effective†exchange rates are discussed in the context of their theoretical underpinnings and construction. Focusing on contemporary indices and recently-developed econometric methods, the empirical characteristics of these differing series are examined for the U.S., the euro area, and several East Asian countries. The issues that confront the applied economist or policymaker in using the measures of real effective exchange rates available are illustrated in several case studies from current interest: (i) evaluating exchange rate misalignment; (ii) testing the Balassa-Samuelson effect; (iii) estimating the price responsiveness of trade flows; and (iv) assessing the potential impact of competitive devaluations. Copyright Springer Science + Business Media, Inc. 2006

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 17 (2006)
Issue (Month): 1 (January)
Pages: 115-143

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Handle: RePEc:kap:openec:v:17:y:2006:i:1:p:115-143

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: real effective exchange rate; overvaluation; competitiveness; stationarity; cointegration; trade balance;

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