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Real Equilibrium Exchange Rate Estimates: To What Extent Are They Applicable for Setting the Central Parity?

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Abstract

The objective of this paper is twofold. First, we provide an introduction on estimation and methodology of the real equilibrium exchange rate. Second, we discuss to what extent are these estimates applicable for setting the central parity. Given the uncertainty surrounding the estimates, they are informative in the sign rather than the size of the misalignment of exchange rate, but may serve as useful consistency checks for the decision about setting the central parity. We argue that policy makers shall consider the estimates in their decisionmaking only if the real exchange rate is substantially misaligned (i.e. more than 10% as a rule of thumb).

Suggested Citation

  • Roman Horváth, 2005. "Real Equilibrium Exchange Rate Estimates: To What Extent Are They Applicable for Setting the Central Parity?," Working Papers IES 75, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  • Handle: RePEc:fau:wpaper:wp075
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    Keywords

    equilibrium exchange rate; monetary policy; ERM II;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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