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Properties of the Fundamental Equilibrium Exchange Rate in Models of the UK Economy

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  • Keith B Church

    (University of Warwick)

Abstract

The Fundamental Equilibrium Exchange Rate (FEER) is that value of the real exchange rate that is consistent with macroeconomic equilibriumo This article uses the long-run trade equation elasticities from the models of Her Majesty's Treasury, the National Institute of Economic and Social Research and the Bank of England to examine the FEER calculation. The sensitivity of the results to changes in the key elasticities and to the possibility of a recent improvement in UK trading performance is considered. Historical comparisons are made between the FEER and the actual real exchange rate. All the results suggest that the real exchange rate was above the FEER at the time of ERM entry. The fixing of the nominal exchange rate removes a possible mechanism by which the economy might reach equilibrium and therefore convergence requires a period where UK inflation is lower than that of its trading partners.

Suggested Citation

  • Keith B Church, 1992. "Properties of the Fundamental Equilibrium Exchange Rate in Models of the UK Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 141(1), pages 62-70, August.
    • Handle: RePEc:sae:niesru:v:141:y:1992:i:1:p:62-70
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    Cited by:

    1. Hoej, Liselotte, 1995. "Fundamental equilibrium exchange rate : a case study of the Finnish Markka," Research Discussion Papers 2/1995, Bank of Finland.
    2. repec:zbw:bofrdp:1995_029 is not listed on IDEAS
    3. Saarenheimo, Tuomas, 1995. "The equilibrium exchange rate for the Finnish Markka," Research Discussion Papers 29/1995, Bank of Finland.
    4. repec:zbw:bofrdp:1995_002 is not listed on IDEAS
    5. Kiptui, Moses C. & Ndirangu, Lydia, 2015. "Determinants of Equilibrium Real Exchange Rate and its Misalignment in Kenya: A Behavioral Equilibrium Exchange Rate Approach," MPRA Paper 70542, University Library of Munich, Germany, revised 06 Apr 2016.
    6. Andrea Saayman, 2010. "A Panel Data Approach To The Behavioural Equilibrium Exchange Rate Of The Zar," South African Journal of Economics, Economic Society of South Africa, vol. 78(1), pages 57-75, March.

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