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

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  • Menzie D. Chinn

Abstract

Several alternative measures of "effective" exchange rates are discussed in the context of their theoretical underpinnings and actual construction. Focusing on contemporary indices and recently developed econometric methods, the empirical characteristics of these differing series are examined, including the exchange rates 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11521.

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Date of creation: Aug 2005
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Publication status: published as Chinn, Menzie D. "A Primer On Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows And Competitive Devaluation," Open Economies Review, 2006, v17(1,Jan), 115-143.
Handle: RePEc:nbr:nberwo:11521

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