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Estimation of consistent multi-country FEERs

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  • Carton, Benjamin
  • Hervé, Karine

Abstract

Most studies on equilibrium exchange rates focus on a limited number of G7 countries. But in a situation of world imbalances, emerging countries can no longer be excluded. The study of all equilibrium exchange rates is delicate. First, the trade model has to be balanced at the aggregate level. This paper suggests a method to achieve world balance both in volume and in value. Second, the N−1 bilateral exchange rates cannot ensure that the N areas will reach their macroeconomic equilibrium simultaneously. This paper examines the existing solutions to solve the N−1 problem and proposes an alternative which minimizes the distance to the current-account targets. Finally, in order to compare the relevance of the different methodologies, FEERs are calculated for 19 industrialized and developing countries. The results, which are taking into account the modification on output gap assessment induced by the 2008–2009 crisis, lead for the year 2010 to a USD closed to its equilibrium, a RMB undervalued by around 35% in real effective terms and to a EUR/USD parity equals to 1.47.

Suggested Citation

  • Carton, Benjamin & Hervé, Karine, 2012. "Estimation of consistent multi-country FEERs," Economic Modelling, Elsevier, vol. 29(4), pages 1205-1214.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1205-1214
    DOI: 10.1016/j.econmod.2012.03.023
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    Citations

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    Cited by:

    1. Saadaoui, Jamel, 2015. "Global imbalances: Should we use fundamental equilibrium exchange rates?," Economic Modelling, Elsevier, vol. 47(C), pages 383-398.
    2. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    3. Jamel Saadaoui, 2012. "Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates?," Working Papers halshs-00750551, HAL.
    4. Jamel Saadaoui, 2016. "Post-Brexit FEER," Working Papers of BETA 2016-51, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    5. Jamel Saadaoui, 2016. "Sur la situation des mésalignements de taux de change après le Brexit," Bulletin de l'Observatoire des politiques économiques en Europe, Observatoire des Politiques Économiques en Europe (OPEE), vol. 35(1), pages 9-13, December.
    6. Jamel Saadaoui, 2017. "Internal Devaluations And Equilibrium Exchange Rates: New Evidences And Perspectives For The Emu," CEPN Working Papers halshs-01633389, HAL.

    More about this item

    Keywords

    Exchange rates; Current account adjustment;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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