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

  • Roman Hotvath

    (Czech National Bank & Charles University)

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 decision- making only if the real exchange rate is substantially misaligned (i.e. more than 10% as a rule of thumb).

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File URL: http://128.118.178.162/eps/if/papers/0509/0509006.pdf
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Paper provided by EconWPA in its series International Finance with number 0509006.

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Length: 24 pages
Date of creation: 20 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0509006
Note: Type of Document - pdf; pages: 24
Contact details of provider: Web page: http://128.118.178.162

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  1. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
  2. Kilian, Lutz & Taylor, Mark P., 2001. "Why is it so difficult to beat the random walk forecast of exchange rates?," Working Paper Series 0088, European Central Bank.
  3. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  4. Égert, Balázs & Halpern, László, 2005. "Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis," CEPR Discussion Papers 4869, C.E.P.R. Discussion Papers.
  5. Ian Babetskii & Balázs Égert, 2005. "Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?," William Davidson Institute Working Papers Series wp781, William Davidson Institute at the University of Michigan.
  6. Égert, Balázs & Lommatzsch, Kirsten, 2004. "Equilibrium exchange rates in the transition: The tradable price-based real appreciation and estimation uncertainty," BOFIT Discussion Papers 9/2004, Bank of Finland, Institute for Economies in Transition.
  7. Derviz, Alexis, 2004. "Exchange rate risks and asset prices in a small open economy," Working Paper Series 0314, European Central Bank.
  8. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
  9. Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, 07.
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  11. repec:dgr:uvatin:20010031 is not listed on IDEAS
  12. Ronald Macdonald & Mark P. Taylor, 1992. "Exchange Rate Economics: A Survey," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 1-57, March.
  13. Ronald MacDonald & Luca Antonio Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers 03/44, International Monetary Fund.
  14. Lucio Sarno & Ibrahim Chowdhury, 2003. "The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(3), pages 295-333, November.
  15. Frait , Jan & Komárek, Luboš, 2001. "REAL Exchange rate trends in transitional countries," The Warwick Economics Research Paper Series (TWERPS) 596, University of Warwick, Department of Economics.
  16. Louis Kuijs & Alain Borghijs, 2004. "Exchange Rates in Central Europe; A Blessing o+L2762r a Curse?," IMF Working Papers 04/2, International Monetary Fund.
  17. Jesús Crespo-Cuaresma & Jarko Fidrmuc & Ronald McDonald, 2004. "The monetary approach to exchange rates in the CEECs," Macroeconomics 0401013, EconWPA.
  18. Detken, Carsten & Dieppe, Alistair & Henry, Jérôme & Marin, Carmen & Smets, Frank, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 0160, European Central Bank.
  19. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
  20. Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2004. "Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective," Working Paper Series 0353, European Central Bank.
  21. Jes�s Crespo Cuaresma & Jaroslava Hlouskova, 2005. "Beating the random walk in Central and Eastern Europe," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(3), pages 189-201.
  22. MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre.
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