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Equilibrium Real Exchange Rate Estimates Across Time and Space

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  • Christoph Fischer

Abstract

Equilibrium real exchange rate and corresponding misalignment estimates differ tremendously depending on the panel estimation method used to derive them. Essentially, these methods differ in their treatment of the time-series (time) and the cross-section (space) variation in the panel. The study shows that conventional panel estimation methods (pooled OLS, fixed, random and between effects) can be interpreted as restricted versions of a correlated random effects (CRE) model. It formally derives the distortion that arises if these restrictions are violated and uses two empirical applications from the literature to show that the distortion is generally very large. This suggests the use of the CRE model for the panel estimation of equilibrium real exchange rates and misalignments.

Suggested Citation

  • Christoph Fischer, 2019. "Equilibrium Real Exchange Rate Estimates Across Time and Space," Globalization Institute Working Papers 362, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:362
    DOI: 10.24149/gwp362
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    Cited by:

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    2. Rui Mano & Ms. Carolina Osorio-Buitron & Mr. Luca A Ricci & Mr. Mauricio Vargas, 2019. "The Level REER model in the External Balance Assessment (EBA) Methodology," IMF Working Papers 2019/192, International Monetary Fund.

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    More about this item

    Keywords

    Equilibrium real exchange rate; panel estimation method; correlated random effects model; productivity approach; BEER; price competitiveness;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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