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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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  1. Kym Anderson & Will Martin & Dominique van der Mensbrugghe, 2006. "Would Multilateral Trade Reform Benefit Sub-Saharan Africans?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 15(4), pages 626-670, December.
  2. Kym Anderson, 2005. "On the Virtues of Multilateral Trade Negotiations," Centre for International Economic Studies Working Papers 2005-15, University of Adelaide, Centre for International Economic Studies.
  3. 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.
  4. Pontines, Victor & Siregar, Reza, 2008. "Fundamental pitfalls of exchange market pressure-based approaches to identification of currency crises," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 345-365.
  5. 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.
  6. Anderson, Kym & Martin, Will & van der Mensbrugghe, Dominique, 2005. "Distortions to world trade: impacts on agricultural markets and farm incomes," Policy Research Working Paper Series 3736, The World Bank.
  7. 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.
  8. Kym Anderson & Will Martin, 2005. "Agricultural Trade Reform and the Doha Development Agenda," Centre for International Economic Studies Working Papers 2005-17, University of Adelaide, Centre for International Economic Studies.
  9. 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.
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