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

Listed author(s):
  • 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
Handle: RePEc:adl:cieswp:2006-04
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  4. Kym Anderson & Will Martin & Dominique van der Mensbrugghe, 2005. "Would Multilateral Trade Reform Benefit Sub-Saharan Africans?," Centre for International Economic Studies Working Papers 2005-18, University of Adelaide, Centre for International Economic Studies.
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  7. Kym Anderson, 2005. "On the Virtues of Multilateral Trade Negotiations," The Economic Record, The Economic Society of Australia, vol. 81(255), pages 414-438, December.
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  11. Victor Pontines & Reza Siregar, 2006. "Fundamental Pitfalls of Exchange Market Pressure-Based Approaches to Identification of Currency Crises," Centre for International Economic Studies Working Papers 2006-02, University of Adelaide, Centre for International Economic Studies.
  12. Ken Miyajima, 2005. "Real Exchange Rates in Growing Economies; How Strong Is the Role of the Nontradables Sector?," IMF Working Papers 05/233, International Monetary Fund.
  13. Anderson, Kym & Martin, Will & van der Mensbrugghe, Dominique, 2006. "Doha merchandise trade reform : what's at stake for developing countries ?," Policy Research Working Paper Series 3848, The World Bank.
  14. Peter B. Clark & Steven A. Symansky & Tamim Bayoumi & Mark P. Taylor, 1994. "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," IMF Working Papers 94/17, International Monetary Fund.
  15. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
  16. Reza Y. Siregar & Victor Pontines, 2005. "External Debt and Exchange Rate Overshooting: The Case of Selected East Asian Countries," School of Economics Working Papers 2005-14, University of Adelaide, School of Economics.
  17. Agnès Bénassy-Quéré & Pascale Duran-Vigneron & Amina Lahrèche-Revil & Mignon, Valerie, 2004. "Burden Sharing and Exchange-Rate Misalignments within the Group of Twenty," Working Papers 2004-13, CEPII research center.
  18. Alfons Palangkaraya & Paul Jensen & Elizabeth Webster, 2006. "Patent Examination Decisions and Strategic Trade Behavior," Centre for International Economic Studies Working Papers 2006-03, University of Adelaide, Centre for International Economic Studies.
  19. Clark, Peter B. & MacDonald, Ronald, 2004. "Filtering the BEER: A permanent and transitory decomposition," Global Finance Journal, Elsevier, vol. 15(1), pages 29-56.
  20. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
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  22. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  23. Ronald MacDonald, 2001. "Modelling the long-run real effective exchange rate of the New Zealand Dollar," Reserve Bank of New Zealand Discussion Paper Series DP2002/02, Reserve Bank of New Zealand.
  24. Frankel, Jeffrey A & Rose, Andrew K, 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," CEPR Discussion Papers 1349, C.E.P.R. Discussion Papers.
  25. MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre.
  26. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  27. Victor Pontines & Reza Siregar, 2006. "Exchange Market Intervention and Evidence of Post-Crisis Flexible Exchange Rate Regimes in Selected East Asian Economies," Centre for International Economic Studies Working Papers 2006-01, University of Adelaide, Centre for International Economic Studies.
  28. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, January.
  29. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  30. 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.
  31. Xiangming Li & Steven V Dunaway, 2005. "Estimating China's "Equilibrium" Real Exchange Rate," IMF Working Papers 05/202, International Monetary Fund.
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