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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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  2. Ronald MacDonald, 2002. "Modelling the Long-run Real Effective Exchange Rate of the New Zealand Dollar," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 519-537, December.
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  4. Reinhart, Carmen & Kaminsky, Graciela, 2000. "Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
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  7. Victor Pontines & Reza Siregar, 2005. "External Debt and Exchange Rate Overshooting: The Case of Selected East Asian Countries," International Finance 0510022, EconWPA.
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  9. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, December.
  10. Anderson, Kym & Martin, Will & van der Mensbrugghe, Dominique, 2005. "Would multilateral trade reform benefit Sub-Saharan Africans?," Policy Research Working Paper Series 3616, The World Bank.
  11. Kym Anderson & Will Martin & Dominique van der Mensbrugghe, 2005. "Doha Merchandise Trade Reform: WhatÂ’s at Stake for Developing Countries?," Centre for International Economic Studies Working Papers 2005-16, University of Adelaide, Centre for International Economic Studies.
  12. Xiangming Li & Steven Vincent Dunaway, 2005. "Estimating China's "Equilibrium" Real Exchange Rate," IMF Working Papers 05/202, International Monetary Fund.
  13. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  14. 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.
  15. 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.
  16. 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.
  17. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
  18. Clark, Peter B. & MacDonald, Ronald, 2004. "Filtering the BEER: A permanent and transitory decomposition," Global Finance Journal, Elsevier, vol. 15(1), pages 29-56.
  19. 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.
  20. Jerome L. Stein & Giovanna Paladino, 1998. "Exchange Rate Misalignments and Crises," Working Papers 98-7, Brown University, Department of Economics.
  21. Jeffrey J. Frankel and Andrew K. Rose., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers C96-062, University of California at Berkeley.
  22. MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre.
  23. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
  24. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
  25. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy: Prospects and Challenges," IMF Occasional Papers 232, International Monetary Fund.
  26. 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.
  27. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  28. 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.
  29. Kym Anderson & Will Martin & Dominique van der Mensbrugghe, 2006. "Distortions to World Trade: Impacts on Agricultural Markets and Farm Incomes," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 28(2), pages 168-194.
  30. 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.
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