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A Fair Exchange? Theory and Practice of Calculating Equilibrium Exchange Rates
Author:
Mr. Jaewoo Lee
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,
Mr. Hamid Faruqee
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, and
Mr. Tamim Bayoumi
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Series:
IMF Working Papers
Volume/Issue:
Volume 2005: Issue 229
Language:
English
Publication Date:
01 Dec 2005
DOI:
https://doi.org/10.5089/9781451862485.001
ISBN:
9781451862485
ISSN:
1018-5941
Pages:
28
Keywords:
WP; exchange rate
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund