Concepts to Calculate Equilibrium Exchange Rates: An Overview
75 Pages Posted: 8 Jun 2016
Date Written: 2000
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.
Keywords: Equilibrium Exchange Rates, Purchasing Power Parity, Real Exchange Rate Models
JEL Classification: F31
Suggested Citation: Suggested Citation