Misalignment, Debt Accumulation and Fundamental Equilibrium Exchange Rates

1995 ◽  
Vol 153 ◽  
pp. 73-83 ◽  
Author(s):  
Michael J. Artis ◽  
Mark P. Taylor
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Current Account ◽  
Hysteresis Effect ◽  
Equilibrium Exchange Rate ◽  
Formal Expression ◽  
Debt Accumulation ◽  
Equilibrium Exchange ◽  
Rules Of Thumb ◽  
Fundamental Equilibrium Exchange Rate

This article deals with hysteresis in the fundamental equilibrium exchange rate (FEER) arising from misalignment. When the actual real exchange rate departs from its FEER value, current account realisations—and consequently, debt service obli gations—will differ from those assumed in the initial FEER calculation, necessitating its recomputation. The article derives a formal expression for this hysteresis effect in the FEER, and derives and applies rules of thumb for computing the hysteresis effect when considering the rate of approach of an exchange rate toward its FEER value.

Properties of the fundamental equilibrium exchange rate in the Treasury model

1999 ◽  
Vol 169 ◽  
pp. 96-104 ◽  
Author(s):  
Keith B. Church
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Nominal Exchange Rate ◽  
Equilibrium Exchange Rate ◽  
Natural Rate ◽  
The Real ◽  
Long Run ◽  
Equilibrium Exchange ◽  
The Uk ◽  
Fundamental Equilibrium Exchange Rate

This article calculates the equilibrium real exchange rate for the UK economy. The long-run trade and supply side relationships from HM Treasury's model are used to estimate the level of the real exchange rate consistent with the UK economy growing at its ‘natural’ rate while achieving a sustainable current account position. The model shows that the real exchange rate associated with macroeconomic equilibrium lies well below the actual rate for most of the 1990s. This result has important implications for possible UK participation in the single European currency as, once the nominal exchange rate is fixed, overvaluation can only be corrected by holding UK inflation lower than that elsewhere. Achieving this may be costly in terms of jobs and output.

scholarly journals Exchange rate modelling in the development community using the ARDL cointegration approach: The case of emerging markets

2020 ◽  
Vol 10 (2) ◽  
pp. 53-70
Author(s):  
Abdulkader Aljandali ◽  
Christos Kallandranis
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Equilibrium Exchange Rate ◽  
Distributed Lag ◽  
Autoregressive Distributed Lag ◽  
Ex Post ◽  
Long Run ◽  
Equilibrium Exchange ◽  
Exchange Rate Movements ◽  
Exchange Rate Models

Despite rising interest in African economies, there is little prior research on the determinants of exchange rate movements in the region. This paper examines the monthly exchange rates of the country members of the Southern African Development Community (SADC) from 1990 to 2010 inclusive. Long-run equilibrium exchange rate models are established, exchange rate determinants are identified, and ex-post forecasts are generated for a period of 18 months (Sekantsi, 2011). The autoregressive distributed lag (ARDL) cointegration model is used in this paper, given its statistical advantages over commonly, applied cointegration techniques. Findings show that the ARDL method generates accurate forecasts for eight out of 11 sampled exchange rates. In keeping with earlier literature (e.g., Redda & Muzindusti, 2017; Zerihun & Breitenbach, 2017; etc.), findings suggest that the chances of SADC member countries fulfilling the requirements of a currency union are quite low. This paper marks one of the first attempts in the literature to forecast exchange rates in SADC using the ARDL approach (Pesaran & Shin, 1995). The results would be of interest to policy-makers, researchers and investors.

scholarly journals Financial flows and the New Developmentalism

2018 ◽  
Vol 38 (1) ◽  
pp. 115-124 ◽  
Author(s):  
Fernando J. Cardim de Carvalho
Keyword(s):  
Exchange Rate ◽  
Current Account ◽  
Manufacturing Firms ◽  
Balance Of Payments ◽  
Capital Account ◽  
Equilibrium Exchange Rate ◽  
Large Measure ◽  
Financial Flows ◽  
Equilibrium Exchange

ABSTRACT New Developmentalism has focused its attention on trade problems created, to a large measure, by the divergences between the exchange rate that keeps the current account of the balance of payments balanced and what it calls industrial equilibrium exchange rate, the rate that would preserve the competitiveness of manufacturing firms operating at the state-or-art frontier. ND acknowledges that these rates may be disturbed by financial flows, but the role of capital account movements may be underestimated. The paper argues that financial flows have indeed been underestimated, which may make more difficult to devise efficacious policies to correct the problem of currency overvaluation.

scholarly journals On equilibrium real exchange rates in euro area: Special focus on behavioral equilibrium exchange rates in Ireland and Greece

2012 ◽  
Vol 60 (2) ◽  
pp. 261-270
Author(s):  
Klára Plecitá ◽  
Luboš Střelec
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Euro Area ◽  
Real Exchange Rates ◽  
Special Focus ◽  
Equilibrium Exchange Rate ◽  
Macroeconomic Imbalances ◽  
Long Run ◽  
Equilibrium Exchange ◽  
Behavioral Equilibrium Exchange Rate

This paper focuses on the intra-euro-area imbalances. Therefore the first aim of this paper is to identify euro-area countries exhibiting macroeconomic imbalances. The subsequent aim is to estimate equilibrium real exchange rates for these countries and to compute their degrees of real exchange rate misalignment. The intra-area balance is assessed using the Cluster Analysis and the Principle Component Analysis; on this basis Greece and Ireland are selected as the two euro-area countries with largest imbalances in 2010. Further the medium-run equilibrium exchange rates for Greece and Ireland are estimated applying the Behavioral Equilibrium Exchange Rate (BEER) approach popularised by Clark and MacDonald (1998). In addition, the long-run equilibrium exchange rates are estimated using the Permanent Equilibrium Exchange Rate (PEER) model. Employing the BEER and PEER approaches on quarterly time series of real effective exchange rates (REER) from 1997: Q1 to 2010: Q4 we identify an undervaluation of the Greek and Irish REER around their entrance to the euro area. For the rest of the period analysed their REER is broadly in line with estimated BEER and PEER levels.

Annex I. Fiscal Policy Simulations Using Forward-Looking Exchange Rates in Gem by Andrew Gurney∗

1990 ◽  
Vol 131 ◽  
pp. 47-50 ◽  
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Asset Price ◽  
Equilibrium Exchange Rate ◽  
Equilibrium Exchange ◽  
Short Run ◽  
Policy Simulations ◽  
The Exchange Rate ◽  
The Interest Rate ◽  
Forward Looking

In the past year we have attempted to incorporate forward-looking exchange rates into our econometric model, GEM. This work is still at an experimental stage, and hence will not be immediately available to model-users, but we feel we have made sufficient progress to present some of the results.The introduction of forward-looking exchange rates is consistent with modern economic theories of exchange-rate determination. These view the exchange rate as an asset price, which is valued according to the expected returns from holding domestic and foreign assets. This gives rise to the short-run arbitrage condition, that the interest-rate differential between equivalent assets in different currencies should equal the expected depreciation of the exchange rate between those currencies. The expected depreciation is determined by a longer-term view of the currencies' worth, which can be related to the fundamental equilibrium exchange rate (FEER), which would achieve a balance between the current account and long-term capital account flows. Previous work at the Institute has expanded on some of these issues. Davies (1988) and Gurney (1988) look at some the issues raised by forward-looking exchange rates. Barrell, Gurney, Pesaran and Wren-Lewis (1988) look at alternative forward-looking models and Barrell and Wren-Lewis (1989) investigate FEERs based on the trade equations used in GEM.

Feers and the Path to EMU

1991 ◽  
Vol 137 ◽  
pp. 51-58 ◽  
Author(s):  
Ray Barrell ◽  
J.W. In't Veld
Keyword(s):  
Exchange Rates ◽  
Monetary Union ◽  
Real Exchange Rates ◽  
Equilibrium Exchange Rate ◽  
Future Evolution ◽  
Equilibrium Exchange ◽  
Parametric Change ◽  
European Economies ◽  
Fundamental Equilibrium Exchange Rate ◽  
Recent Version

The concept of the Fundamental Equilibrium Exchange Rate (FEER) was first used in Williamson (1983) to calculate the misalignments of the exchange rates for major currencies, and as a basis for his target zone proposal. In this note we use the same concept in a different context, that of the relations amongst the European economies which are members of the ERM, a system which is evolving towards monetary union. The first section reviews the concept of the FEER and its use in policy analysis. The second section relates this to the analysis of real exchange rates and external balance within a potential monetary union. The third section includes new estimates of FEERs using the most recent version of our world model, and considers the possible future evolution of FEERs in the context of EMU, including some tests of the sensitivity of these estimates to parametric change.

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