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Concepts to Calculate Equilibrium Exchange Rates: An Overview

Author

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  • MacDonald, Ronald

Abstract

In this paper we present a critical overview of differnt methods of constructing an equilibrium exchange rate. The recent literature on purchasing power parity (PPP) indicates that on its own PPP is not a good vehicle for defining an equilibrium exchange rate. Rather, we argue that the latter can only be recover from a model in which the real determinants of exchange rates are explicitly modelled. The advantages and disadvantages of various such models are discussed. In particular, the internal-external balance approach to defining an equilibrium real exchange rate is disccused, and this method is compared to the so-called behavioural equilibrium approach. Finally, an approach which uses purely time series methods to construct an equilibrium exchange rate is also discussed.

Suggested Citation

  • MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4139
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    Keywords

    Equilibrium Exchange Rates; Purchasing Power Parity; Real Exchange Rate Models;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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