Concepts to Calculate Equilibrium Exchange Rates: An Overview

75 Pages Posted: 8 Jun 2016

See all articles by Ronald MacDonald

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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

MacDonald, Ronald R., Concepts to Calculate Equilibrium Exchange Rates: An Overview (2000). Bundesbank Series 1 Discussion Paper No. 2000,03, Available at SSRN: https://ssrn.com/abstract=2785109 or http://dx.doi.org/10.2139/ssrn.2785109

Ronald R. MacDonald (Contact Author)

University of Strathclyde in Glasgow - Department of Economics ( email )

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Government of New Zealand - Department of Economics

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CESifo (Center for Economic Studies and Ifo Institute)

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