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Estimating Consistent Fundamental Equilibrium Exchange Rates

Author

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  • William R. Cline

    (Peterson Institute for International Economics)

Abstract

This paper sets forth a new methodology for obtaining a consistent set of exchange rate realignments needed to accomplish international adjustment in current account imbalances to reach fundamental equilibrium exchange rates (FEERs). The approach is named the symmetric matrix inversion method (SMIM). It is symmetric in that ir treats all countries considered equally rather than seeking exact adjustment for the United States and obtaining other adjustments residually. Country-specific impact parameters based on assumed trade elasticities are applied to a target set of changes in current accounts as percentages of GDP to obtain a corresponding set of target changes in real effective (trade-weighted) exchange rates. A matrix inversion technique is then applied to identify the corresponding set of changes in bilateral exchange rates against the dollar needed to approach as closely as possible the target set of effective exchange rate changes.

Suggested Citation

  • William R. Cline, 2008. "Estimating Consistent Fundamental Equilibrium Exchange Rates," Working Paper Series WP08-6, Peterson Institute for International Economics.
    • Handle: RePEc:iie:wpaper:wp08-6
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    References listed on IDEAS

    as
    1. William R. Cline, 1995. "International Economic Policy in the 1990s," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203221x, December.
    2. William R. Cline & John Williamson, 2008. "New Estimates of Fundamental Equilibrium Exchange Rates," Policy Briefs PB08-7, Peterson Institute for International Economics.
    3. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Exchange Rates; Current Account Adjustment; Dollar;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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