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Real Equilibrium Exchange Rate Estimates: To What Extent Applicable for Setting the Central Parity?

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Roman Hotvath (Czech National Bank & Charles University)

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Abstract

The objective of this paper is twofold. First, we provide an introduction on estimation and methodology of the real equilibrium exchange rate. Second, we discuss to what extent are these estimates applicable for setting the central parity. Given the uncertainty surrounding the estimates, they are informative in the sign rather than the size of the misalignment of exchange rate, but may serve as useful consistency checks for the decision about setting the central parity. We argue that policy makers shall consider the estimates in their decision- making only if the real exchange rate is substantially misaligned (i.e. more than 10% as a rule of thumb).

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Paper provided by EconWPA in its series International Finance with number 0509006.

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Length: 24 pages
Date of creation: 20 Sep 2005
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Handle: RePEc:wpa:wuwpif:0509006

Note: Type of Document - pdf; pages: 24
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F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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  5. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of It," IMF Working Papers 97/21, International Monetary Fund.
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  14. Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, 07. [Downloadable!] (restricted)
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  15. Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
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  16. Jesús Crespo Cuaresma & Jaroslava Hlouskova, 2005. "Beating the random walk in Central and Eastern Europe," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(3), pages 189-201. [Downloadable!]
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