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Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates

  • Jamel Saadaoui

    ()

    (University of Paris North)

The paper investigates if the most popular alternative to the purchasing parity power approach (PPP) to estimate equilibrium exchange rates, the fundamental equilibrium exchange rate (FEER) influences exchange rate dynamics in the long run. For a large panel of industrialized and emerging countries and on the period 1982-2007, we detect the presence of unit roots in the series of real effective exchange rates and in the series of FEERs. We find and estimate a cointegration relationship between real effective exchange rates and FEERs. The results show that the FEER has a positive and significant influence on exchange rate dynamics in the long run.

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File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P180.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 3 ()
Pages: 1993-2005

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Handle: RePEc:ebl:ecbull:eb-11-00033
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  1. William R. Cline, 2008. "Estimating Consistent Fundamental Equilibrium Exchange Rates," Working Paper Series WP08-6, Peterson Institute for International Economics.
  2. Martin S. Feldstein, 2011. "The Role of Currency Realignments in Eliminating the US and China Current Account Imbalances," NBER Working Papers 16674, National Bureau of Economic Research, Inc.
  3. Barisone, G. & Driver, R.L. & Wren-Lewis, S., 2000. "Are Our FEERs Justified?," Discussion Papers 0002, Exeter University, Department of Economics.
  4. Westerlund, Joakim, 2005. "Testing for Error Correction in Panel Data," Working Papers 2005:11, Lund University, Department of Economics.
  5. Didier Borowski & Cecile Couharde, 2003. "The Exchange Rate Macroeconomic Balance Approach: New Methodology and Results for the Euro, the Dollar, the Yen and the Pound Sterling," Open Economies Review, Springer, vol. 14(2), pages 169-190, April.
  6. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  7. Martin, Feldstein, 2011. "The role of currency realignments in eliminating the US and China current account imbalances," Journal of Policy Modeling, Elsevier, vol. 33(5), pages 731-736, September.
  8. Su Zhou, 1993. "Fundamental equilibrium exchange rates and exchange rate dynamics," Open Economies Review, Springer, vol. 4(2), pages 189-209, June.
  9. Se-Eun Jeong & Jacques Mazier, 2003. "Exchange Rate Regimes and Equilibrium Exchange Rates in East Asia," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1161-1182.
  10. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  11. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  12. Joseph E. Gagnon, 2011. "Current Account Imbalances Coming Back," Working Paper Series WP11-1, Peterson Institute for International Economics.
  13. repec:cai:recosp:reco_545_0001 is not listed on IDEAS
  14. William R. Cline & John Williamson, 2010. "Currency Wars?," Policy Briefs PB10-26, Peterson Institute for International Economics.
  15. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  16. Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2010. "Exchange Rate Misalignments at World and European Levels: a FEER Approach," Post-Print halshs-00435836, HAL.
  17. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
  18. Nabil Aflouk & Se-Eun Jeong & Jacques Mazier & Jamel Saadaoui, 2011. "Exchange Rate Misalignments and World Imbalances: a FEER Approach for Emerging Countries," Post-Print halshs-00484808, HAL.
  19. Damiaan Persyn & Joakim Westerlund, 2008. "Error-correction–based cointegration tests for panel data," Stata Journal, StataCorp LP, vol. 8(2), pages 232-241, June.
  20. William R. Cline & John Williamson, 2011. "Estimates of Fundamental Equilibrium Exchange Rates, May 2011," Policy Briefs PB11-5, Peterson Institute for International Economics.
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