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Misalignment, Debt Accumulation and Fundamental Equilibrium Exchange Rates

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  • Michael J. Artis

    (European University Institute, Florence and Centre for Economic Policy Research)

  • Mark P. Taylor

    (University of Liverpool and Centre for Economic Policy Research)

Abstract

This article deals with hysteresis in the fundamental equilibrium exchange rate (FEER) arising from misalignment. When the actual real exchange rate departs from its FEER value, current account realisations—and consequently, debt service obli gations—will differ from those assumed in the initial FEER calculation, necessitating its recomputation. The article derives a formal expression for this hysteresis effect in the FEER, and derives and applies rules of thumb for computing the hysteresis effect when considering the rate of approach of an exchange rate toward its FEER value.

Suggested Citation

  • Michael J. Artis & Mark P. Taylor, 1995. "Misalignment, Debt Accumulation and Fundamental Equilibrium Exchange Rates," National Institute Economic Review, National Institute of Economic and Social Research, vol. 153(1), pages 73-83, August.
    • Handle: RePEc:sae:niesru:v:153:y:1995:i:1:p:73-83
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    Cited by:

    1. Katerina Smidkova, 2003. "Estimating the FEER for the Czech Economy," Macroeconomics 0303014, University Library of Munich, Germany.
    2. Dubas, Justin M., 2009. "The Importance of the Exchange Rate Regime in Limiting Misalignment," World Development, Elsevier, vol. 37(10), pages 1612-1622, October.

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