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Concepts to Calculate Equilibrium Exchange Rates: An Overview

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  • MacDonald, Ronald

Abstract

In this paper we present a critical overview of differnt methods of constructing an equilibrium exchange rate. The recent literature on purchasing power parity (PPP) indicates that on its own PPP is not a good vehicle for defining an equilibrium exchange rate. Rather, we argue that the latter can only be recover from a model in which the real determinants of exchange rates are explicitly modelled. The advantages and disadvantages of various such models are discussed. In particular, the internal-external balance approach to defining an equilibrium real exchange rate is disccused, and this method is compared to the so-called behavioural equilibrium approach. Finally, an approach which uses purely time series methods to construct an equilibrium exchange rate is also discussed. --

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2000,03.

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Date of creation: 2000
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Handle: RePEc:zbw:bubdp1:4139

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Keywords: Equilibrium Exchange Rates; Purchasing Power Parity; Real Exchange Rate Models;

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