Methods of Estimating the Equilibrium Real Effective Exchange Rate (REER)
There are many debates now regarding undervalued
and overvalued currencies currently traded on the world financial
market. This paper contributes to these debates from a theoretical
point of view. We present the three most commonly used methods of
estimating the equilibrium real effective exchange rate (REER):
macroeconomic balance approach, external sustainability approach
and equilibrium real effective exchange rate approach in the reduced
form. Moreover, we discuss key concepts of the calculation of the
real exchange rate (RER) based on applied explanatory variables:
nominal exchange rates, terms of trade and tradable and non-tradable
goods. Last but not least, we discuss the three main driving forces
behind real exchange rates movements which include terms of trade,
relative productivity growth and the interest rate differential.
[1] J. Baffes, I. Elbadawi, A. O'Connel , "Single Equation Estimation of the
Equilibrium Real Exchange Rate," The World Bank Policy Research
Working Paper, no. 1800, Aug 1997.
[2] B. Balassa, "The Purchasing Power Parity Doctrine: A Reappraisal,"
Journal of Political Economy, vol. 72, no. 6, pp. 584-596, Dec 1964.
[3] T. Bayoumi, J. Lee, S. Jayanthi, "New Rates from New Weights," IMF
Staff Paper, vol. 53, no. 2, pp. 272-305, 2006.
[4] Y. Chen, K. Rogoff, "Commodity Currencies," Journal of International
Economics, no. 60/1, pp. 133-160, 2003.
[5] G. E. Chortareas, R. L. Driver, "PPP and the real exchange rate-real
interest rate differential puzzle revisited: evidence from non-stationary
panel data," Bank of England Working Paper, no. 138, Jun 2001.
[6] J. Greenwood, "The Costs and Implications of PBC Sterilization," Cato
Journal, no. 2, vol. 28, pp. 205-217, Spring/Summer 2008.
[7] International Monetary Fund, "Methodology for CGER Exchange Rate
Assessments," Paper worked out by the Research Department, Nov
2006.
[8] P. Jakubik and P. Teply,"The JT index as an indicator of financial
stability of corporate sector", Prague Economic Papers, vol. 2, June
2011, pp. 155-175, ISSN 1210-0455.
[9] K. Pokorna and P. Teply, "Sovereign Credit Risk Measures", Proc. of
2010 International Conference on Business and Economic Sciences,
Dubai: World Academy of Science, Engineering and Technology, vol.
73, January 2011, pp. 652-656.
[10] M. Rippel and P. Teply,"Operational Risk - Scenario Analysis", Prague
Economic Papers, vol. 1, March 2011, pp. 23-39, ISSN 1210-0455.
[11] P. R. Lane, G. M. Milesi-Ferretti, " The External Wealth of Nations
Mark II: Revised and Extended Estimates of Foreign Assets and
Liabilities," IMF Working Paper, no. 06/69, Mar 2006.
[12] P. J. Montiel, "The Long-run Equilibrium Real Exchange Rate: Theory
and Measurement," IMF Macroeconomic Management: Programs and
Policies paper, pp. 307-333, 2002.
[13] L. A. Ricci, G. M. Milesi-Ferretti, J. Lee, J., "Real Exchange Rates and
Fundamentals: A Cross-Country Perspective," IMF Working Paper, no.
08/13, Jan 2008.
[14] P. Ruzickova, "Exchange rates in the global crisis: the role of
fundamentals", diploma thesis, Prague: Charles University, 2011.
[15] P. Samuelsson, "Theoretical Notes on Trade Problems", The Review of
Economics and Statistics, May 1964
[16] P. Teply, R. Chalupka, and J. Cernohorsky, "Operational Risk And
Economic Capital Modeling", Proc. International Conference on
Business, Economics and Tourism Management, World Academic
Press, Feb. 2010, pp. 70-75, ISBN13: 978-1-84626-026-1.
[17] P. Teply, "Exit Strategies from The Global Crisis", Proc. of 2010
International Conference on Business, Economics and Tourism
Management, Paris: World Academy of Science, Engineering and
Technology, 2010, pp. 387-392, ISSN: 2070-3724.
[18] P. Teply, "The Key Challenges of The New Bank Regulations", Proc. of
2010 International Conference on Business, Economics and Tourism
Management, Paris: World Academy of Science, Engineering and
Technology, 2010, pp. 383-386, ISSN: 2070-3724.
[19] P. Teply, "The Future Regulatory Challenges of Liquidity Risk
Management ", Proc. of 2011 International Conference on Business
and Economic Sciences, Dubai: World Academy of Science,
Engineering and Technology, vol. 73, January 2011, pp. 657-661.
[20] P. Vodová, "Liquidity of Czech commercial banks and its
determinants", International Journal of Mathematical Models and
Methods in Applied Sciences, Vol. 5 (6), 2011, pp.1060-1067
[1] J. Baffes, I. Elbadawi, A. O'Connel , "Single Equation Estimation of the
Equilibrium Real Exchange Rate," The World Bank Policy Research
Working Paper, no. 1800, Aug 1997.
[2] B. Balassa, "The Purchasing Power Parity Doctrine: A Reappraisal,"
Journal of Political Economy, vol. 72, no. 6, pp. 584-596, Dec 1964.
[3] T. Bayoumi, J. Lee, S. Jayanthi, "New Rates from New Weights," IMF
Staff Paper, vol. 53, no. 2, pp. 272-305, 2006.
[4] Y. Chen, K. Rogoff, "Commodity Currencies," Journal of International
Economics, no. 60/1, pp. 133-160, 2003.
[5] G. E. Chortareas, R. L. Driver, "PPP and the real exchange rate-real
interest rate differential puzzle revisited: evidence from non-stationary
panel data," Bank of England Working Paper, no. 138, Jun 2001.
[6] J. Greenwood, "The Costs and Implications of PBC Sterilization," Cato
Journal, no. 2, vol. 28, pp. 205-217, Spring/Summer 2008.
[7] International Monetary Fund, "Methodology for CGER Exchange Rate
Assessments," Paper worked out by the Research Department, Nov
2006.
[8] P. Jakubik and P. Teply,"The JT index as an indicator of financial
stability of corporate sector", Prague Economic Papers, vol. 2, June
2011, pp. 155-175, ISSN 1210-0455.
[9] K. Pokorna and P. Teply, "Sovereign Credit Risk Measures", Proc. of
2010 International Conference on Business and Economic Sciences,
Dubai: World Academy of Science, Engineering and Technology, vol.
73, January 2011, pp. 652-656.
[10] M. Rippel and P. Teply,"Operational Risk - Scenario Analysis", Prague
Economic Papers, vol. 1, March 2011, pp. 23-39, ISSN 1210-0455.
[11] P. R. Lane, G. M. Milesi-Ferretti, " The External Wealth of Nations
Mark II: Revised and Extended Estimates of Foreign Assets and
Liabilities," IMF Working Paper, no. 06/69, Mar 2006.
[12] P. J. Montiel, "The Long-run Equilibrium Real Exchange Rate: Theory
and Measurement," IMF Macroeconomic Management: Programs and
Policies paper, pp. 307-333, 2002.
[13] L. A. Ricci, G. M. Milesi-Ferretti, J. Lee, J., "Real Exchange Rates and
Fundamentals: A Cross-Country Perspective," IMF Working Paper, no.
08/13, Jan 2008.
[14] P. Ruzickova, "Exchange rates in the global crisis: the role of
fundamentals", diploma thesis, Prague: Charles University, 2011.
[15] P. Samuelsson, "Theoretical Notes on Trade Problems", The Review of
Economics and Statistics, May 1964
[16] P. Teply, R. Chalupka, and J. Cernohorsky, "Operational Risk And
Economic Capital Modeling", Proc. International Conference on
Business, Economics and Tourism Management, World Academic
Press, Feb. 2010, pp. 70-75, ISBN13: 978-1-84626-026-1.
[17] P. Teply, "Exit Strategies from The Global Crisis", Proc. of 2010
International Conference on Business, Economics and Tourism
Management, Paris: World Academy of Science, Engineering and
Technology, 2010, pp. 387-392, ISSN: 2070-3724.
[18] P. Teply, "The Key Challenges of The New Bank Regulations", Proc. of
2010 International Conference on Business, Economics and Tourism
Management, Paris: World Academy of Science, Engineering and
Technology, 2010, pp. 383-386, ISSN: 2070-3724.
[19] P. Teply, "The Future Regulatory Challenges of Liquidity Risk
Management ", Proc. of 2011 International Conference on Business
and Economic Sciences, Dubai: World Academy of Science,
Engineering and Technology, vol. 73, January 2011, pp. 657-661.
[20] P. Vodová, "Liquidity of Czech commercial banks and its
determinants", International Journal of Mathematical Models and
Methods in Applied Sciences, Vol. 5 (6), 2011, pp.1060-1067
@article{"International Journal of Business, Human and Social Sciences:51635", author = "Pavla Ruzickova and Petr Teply", title = "Methods of Estimating the Equilibrium Real Effective Exchange Rate (REER)", abstract = "There are many debates now regarding undervalued
and overvalued currencies currently traded on the world financial
market. This paper contributes to these debates from a theoretical
point of view. We present the three most commonly used methods of
estimating the equilibrium real effective exchange rate (REER):
macroeconomic balance approach, external sustainability approach
and equilibrium real effective exchange rate approach in the reduced
form. Moreover, we discuss key concepts of the calculation of the
real exchange rate (RER) based on applied explanatory variables:
nominal exchange rates, terms of trade and tradable and non-tradable
goods. Last but not least, we discuss the three main driving forces
behind real exchange rates movements which include terms of trade,
relative productivity growth and the interest rate differential.", keywords = "real exchange rate, real effective exchange rate,
foreign exchange, terms of trade", volume = "6", number = "5", pages = "767-4", }
