FEERs and Uncertainty: Confidence Intervals for the Fundamental Equilibrium Exchange Rate of the Canadian Dollar

July 1, 1996

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Format: Chicago

Charles Frederick Kramer. FEERs and Uncertainty: Confidence Intervals for the Fundamental Equilibrium Exchange Rate of the Canadian Dollar, (USA: International Monetary Fund, 1996) accessed December 30, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Models of Fundamental Equilibrium Exchange Rates (FEERs) impose internal and external balance, and so appeal to fundamental notions of equilibrium from a macroeconomic perspective. However, the need to estimate internal and external imbalances creates uncertainty in the approach. Parameters must be estimated, and equilibrium balances must be gauged using judgement. Hence it makes sense to consider the FEER as a statistical estimate rather than a fixed number, and to calculate confidence intervals for the FEER. This paper calculates such confidence intervals with data for Canada, under a variety of assumptions. The estimated confidence intervals are quite wide, principally because of uncertainty about price elasticities in the underlying trade equations.

Subject: Balance of payments, Current account, Exchange rates, Foreign exchange, Output gap, Price elasticity, Prices, Production, Real exchange rates

Keywords: Current account, Equilibrium current account, Exchange rates, FEER estimate, FEER misalignment estimate, Marshall-Lerner condition, Output gap, Price elasticity, Real exchange rates, Trade elasticity, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1996/068
Stock No:

WPIEA0681996
ISBN:

9781451848960
ISSN:

1018-5941

Notes

Models of Fundamental Equilibrium Exchange Rates (FEERs).

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