A Fair Exchange? Theory and Practice of Calculating Equilibrium Exchange Rates

By Jaewoo Lee, Hamid Faruqee, Tamim Bayoumi

December 1, 2005

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Format: Chicago

Jaewoo Lee, Hamid Faruqee, and Tamim Bayoumi. A Fair Exchange? Theory and Practice of Calculating Equilibrium Exchange Rates, (USA: International Monetary Fund, 2005) accessed November 23, 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

We develop a theory-based model of equilibrium exchange rates incorporating factors that have been found to matter empirically. The model provides insights into how variables should be measured and what are appropriate cross-country restrictions. We estimate this model using a panel of 12 industrial countries. The model fits the data relatively well, implying relatively fast adjustment to equilibrium and outperforming a random walk at longer horizons. Furthermore, we find that the rate of adjustment depends on the distance from equilibrium, suggesting that part of the explanation for slow adjustment is inaccurate measures of equilibrium.

Subject: Exchange rates, Foreign assets, Manufacturing, Purchasing power parity, Real exchange rates

Keywords: Exchange rate, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/229
Stock No:

WPIEA2005229
ISBN:

9781451862485
ISSN:

1018-5941

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