Estimating Consistent Fundamental Equilibrium Exchange Rates

William Cline

No WP08-6, Working Paper Series from Peterson Institute for International Economics

Abstract: This paper sets forth a new methodology for obtaining a consistent set of exchange rate realignments needed to accomplish international adjustment in current account imbalances to reach fundamental equilibrium exchange rates (FEERs). The approach is named the symmetric matrix inversion method (SMIM). It is symmetric in that ir treats all countries considered equally rather than seeking exact adjustment for the United States and obtaining other adjustments residually. Country-specific impact parameters based on assumed trade elasticities are applied to a target set of changes in current accounts as percentages of GDP to obtain a corresponding set of target changes in real effective (trade-weighted) exchange rates. A matrix inversion technique is then applied to identify the corresponding set of changes in bilateral exchange rates against the dollar needed to approach as closely as possible the target set of effective exchange rate changes.

Keywords: Exchange Rates; Current Account Adjustment; Dollar (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-cba and nep-opm
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Citations: View citations in EconPapers (61)

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