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How Robust Are Estimates of Equilibrium Real Exchange Rates

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  • Lamin Leigh
  • Steven Vincent Dunaway
  • Xiangming Li
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    Abstract

    Increased attention is being paid to assessments of the actual values of countries'' real exchange rates relative to their "equilibrium" values as suggested by "fundamental" determining factors. This paper assesses the robustness of alternative approaches and models commonly used to derive equilibrium real exchange rate estimates. Using China''s currency to illustrate this analysis, the variance in estimates raises serious questions regarding how robust the results are. The basic conclusion from the tests used here is that, at least for China, small changes in model specifications, explanatory variable definitions, and time periods used in estimation can lead to very substantial differences in equilibrium real exchange rate estimates. Thus, such estimates should be treated with great caution.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/220.

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    Length: 13
    Date of creation: 01 Oct 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/220

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    Related research

    Keywords: Exchange rates; Economic models; exchange rate; real exchange rate; equation; current account balance; real exchange rates; real effective exchange rate; effective exchange rate; equilibrium exchange rate; mean group; correlation; econometrics; foreign exchange; data analysis; equations; time series; independent variable; covariance; cointegration; official exchange rate; statistics; real effective exchange rates; normal distribution; estimation technique; exchange rate need; equilibrium ? exchange rate; asymptotic normal distribution; asymptotic distribution; exchange rate adjustment; cross-country variation; exchange rate movements; estimation period; effective exchange rates; exchange rate policies; estimation of short-run coefficients; arithmetic; exchange rate dynamics; current accounts;

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    1. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    2. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
    3. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
    4. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
    5. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
    6. International Monetary Fund, 1999. "Neglected Heterogeneity and Dynamics in Cross-Country Savings Regressions," IMF Working Papers 99/128, International Monetary Fund.
    7. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
    8. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2005. "Why the renminbi might be overvalued (but probably isn’t)," Proceedings, Federal Reserve Bank of San Francisco.
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