Calculating the Fundamental Equilibrium Exchange Rate of the Macedonian Denar
The real exchange rate is a macroeconomic variable of a crucial importance, since it determines relative price of goods and services home and abroad, and influences economic agents’ decisions. The real exchange rate needs to be on the right level, as it can result in wrong signals and economic distortions if it is not. In order to be able to say whether a currency is misaligned or not, one needs some measure of the just exchange rate – the equilibrium exchange rate. Many different concepts of equilibrium exchange rates exist. The one which is defined as the real effective exchange rate that is consistent with the economy being in internal and external equilibrium in the medium term is the subject of this thesis, and is known under the name of Fundamental Equilibrium Exchange Rate concept. The first part of this study, thus, explains the concept of Fundamental Equilibrium Exchange Rate and surveys the literature on the uses to which it has been put and on the ways in which it has been calculated. The second part of the dissertation illustrates how the Fundamental Equilibrium Exchange Rate concept can be operationalised towards the end of assessing the right parity of the Macedonian denar. What we find is that the denar is neither overvalued nor overvalued in the period 1998-2005. That would imply that price competitiveness is not adversely affected, and that the exchange rate does not generate distortions in the economy. We also find that the fundamental equilibrium exchange rate tends to appreciate due to the increase in the net current transfers flows. In contrast, the real effective exchange rate tends to depreciate in the last three periods, and we are of the opinion that if these trends are maintained, in near future the denar might become undervalued.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kateřina Šmídková & Ray Barrell & Dawn Holland, 2003.
"Estimates of fundamental real exchange rates for the five eu pre-accession countries,"
Prague Economic Papers,
University of Economics, Prague, vol. 2003(4).
- Katerina Smidkova & Ray Barrell & Dawn Holland, 2002. "Estimates of Fundamental Real Exchange Rates for the Five EU Pre-Accession Countries," Working Papers 2002/03, Czech National Bank, Research Department.
- Ray Barrell & Dawn Holland & Katerina Smidkova, 2003. "Estimates of Fundamental Real Echange Rates for the Five EU Pre- Accession Countries," Macroeconomics 0303016, EconWPA.
- Perron, P, 1988.
"The Great Crash, The Oil Price Shock And The Unit Root Hypothesis,"
338, Princeton, Department of Economics - Econometric Research Program.
- Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
- Artus, Jacques R., 1978. "Methods of assessing the long-run equilibrium value of an exchange rate," Journal of International Economics, Elsevier, vol. 8(2), pages 277-299, May.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Alain Noullez & Alessandra Iacobucci, 2004.
"A Frequency-selective Filter for Short-Length Time Series,"
Computing in Economics and Finance 2004
128, Society for Computational Economics.
- Alessandra Iacobucci & Alain Noullez, 2005. "A Frequency Selective Filter for Short-Length Time Series," Computational Economics, Society for Computational Economics, vol. 25(1), pages 75-102, February.
- Alessandra Iacobucci & Alain Noullez, 2004. "A Frequency Selective Filter for Short-Length Time Series," Documents de Travail de l'OFCE 2004-05, Observatoire Francais des Conjonctures Economiques (OFCE).
- Sónia Costa, 1998. "Determination of the equilibrium real exchange rate for the Portuguese economy using the FEER," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
- Katerina Smidkova, 2003. "Estimating the FEER for the Czech Economy," Macroeconomics 0303014, EconWPA.
- Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
- Virginie Coudert & Cécile Couharde, 2002.
"Exchange Rate Regimes and Sustainable Parities for CEECs in the Run-up to EMU Membership,"
2002-15, CEPII research center.
- Virginie Coudert & Cécile Couharde, 2003. "Exchange Rate Regimes and Sustainable Parities for ceecs in the Run-up to emu Membership," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 983-1012.
- Jakub Borowski & Anna Czogala & Adam Czyzewski, 2005. "Looking Forward Towards the ERM II Central Parity: The Case of Poland," Economie Internationale, CEPII research center, issue 102, pages 9-31.
- Johansen, Soren, 1992.
"Determination of Cointegration Rank in the Presence of a Linear Trend,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
- Johansen, S., 1991. "Determination of Cointegration Rank in the Presence of a Linear Trend," Papers 76a, Helsinki - Department of Economics.
- M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Menzie D. Chinn & Hiro Ito, 2005.
"Current Account Balances, Financial Development and Institutions: Assaying the World "Savings Glut","
NBER Working Papers
11761, National Bureau of Economic Research, Inc.
- Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 546-569, June.
- Stein, Jerome L., 1990. "The real exchange rate," Journal of Banking & Finance, Elsevier, vol. 14(5), pages 1045-1078, November.
- Balazs Egert & Amina Lahrèche-Revil, 2003. "Estimating the Fundamental Equilibrium Exchange Rate of Central and Eastern European Countries; The EMU Enlargement Perspective," Working Papers 2003-05, CEPII research center.
- Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
- Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:43161. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.