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Examining measures of the equilibrium Real Exchange Rate: Macroeconomic Balance and the Natural Real Exchange Rate Approaches

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  • Wright, Nicholas Anthony

Abstract

This paper examines two measures of the equilibrium real exchange rate using the Macroeconomic Balance (MB) and the Natural Real Exchange Rate (NATREX) approaches. Unlike previous studies, this study controls for business cycle effects and the debt sustainability position of countries on the current account, while providing a more comprehensive measure of relative productivity. A longitudinal panel econometric technique is utilized on a set of countries from the Western Hemisphere. These countries operate a managed float exchange rate system; have similar output per capita and equivalent levels of openness. The findings suggest that there were several intervals of exchange rate misalignment for each country, including Jamaica, over the 1990-2010 study period. The exchange rate misalignment series was found to be stationary which is an indication that there is a long-run equilibrium mean and a constant variance for exchange rate misalignment. This long-run misalignment mean is assumed to be zero by economic theory. The Autoregressive Distributive Lag (ARDL) error correction model suggests that disequilibrium in the exchange rate is adjusted by 46.2 per cent each year and the half-life deviation formula suggests that a half of the deviation in the exchange rate is corrected after 1.1 years for each country in the panel.

Suggested Citation

  • Wright, Nicholas Anthony, 2013. "Examining measures of the equilibrium Real Exchange Rate: Macroeconomic Balance and the Natural Real Exchange Rate Approaches," MPRA Paper 61170, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:61170
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    More about this item

    Keywords

    Macro-balance approach; NATREX; Current Account Misalignment; Real Effective Exchange Rates; Exchange Rate Misalignment; Trade.;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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