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Models of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature

  • Reza Siregar

    ()

    (School of Economics, University of Adelaide)

  • Ramkishen Rajan

    ()

    (School of Public Policy, George Mason University)

One of the more important concepts in open macroeconomics is the “equilibrium real exchange rate” (ERER). Real exchange rate misalignments are argued to have been the cause of loss of competitiveness and growth slowdowns and eventual currency crises (in the event of sustained overvaluations), overheating (in the event of sustained undervaluation), sectoral misallocation of resources, and global macroeconomic imbalances. This paper examines the underlying concepts, assumptions and analytical bases of commonly employed models of the equilibrium real exchange rate and the manner in which they are usually computed (i.e. operationalized) as well as their shortcomings.

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Paper provided by University of Adelaide, Centre for International Economic Studies in its series Centre for International Economic Studies Working Papers with number 2006-04.

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Length: 28 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:adl:cieswp:2006-04
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