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Single-equation estimation of the equilibrium real exchange rate

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Author Info
Baffes, John
Elbadawi, Ibrahim A.
O'Connell, Stephen A.

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Abstract

Estimating the degree of exchange-rate misalignment remains one of the most challenging empirical problems in an open economy. The basic problem is that the value of the real exchange rate is not observable. Standard theory tells us, however, that the equilibrium real exchange rate is a function of observable macroeconomic variables and that the actual real exchange rate approaches the equilibrium rate over time. A recent strand of the empirical literature exploits these observations to develop a single-equation approach to estimating the equilibrium real exchange rate. Drawing on that earlier work, the authors outline an econometric methodology for estimating both the equilibrium real exchange rate and the degree of exchange-rate misalignment. They illustrate the methodology using annual data from Cote d'Ivoire and Burkina Faso.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1800.

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Date of creation: 31 Aug 1997
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Handle: RePEc:wbk:wbrwps:1800

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Keywords: Fiscal&Monetary Policy; Economic Theory&Research; Environmental Economics&Policies; ICT Policy and Strategies; Scientific Research&Science Parks; Economic Stabilization; Macroeconomic Management; Economic Theory&Research; Environmental Economics&Policies; Achieving Shared Growth;

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  2. Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100 Elsevier. [Downloadable!] (restricted)
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  10. Urbain, Jean-Pierre, 1992. "On Weak Exogeneity in Error Correction Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(2), pages 187-207, May.
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  14. repec:cup:etheor:v:11:y:1995:i:5:p:1033-94 is not listed on IDEAS
  15. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
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  19. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September. [Downloadable!] (restricted)
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  21. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October. [Downloadable!] (restricted)
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  23. Ericsson, Neil R., 1995. "Conditional and structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 159-171, September. [Downloadable!] (restricted)
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  24. Devarajan, Shantayanan & Lewis, Jeffrey D & Robinson, Sherman, 1993. "External Shocks, Purchasing Power Parity, and the Equilibrium Real Exchange Rate," World Bank Economic Review, Oxford University Press, vol. 7(1), pages 45-63, January.
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