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Models of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature

Reza Siregar () and Ramkishen Rajan ()

No 2006-04, Centre for International Economic Studies Working Papers from University of Adelaide, Centre for International Economic Studies

Abstract: One of the more important concepts in open macroeconomics is the “equilibrium real exchange rate” (ERER). Real exchange rate misalignments are argued to have been the cause of loss of competitiveness and growth slowdowns and eventual currency crises (in the event of sustained overvaluations), overheating (in the event of sustained undervaluation), sectoral misallocation of resources, and global macroeconomic imbalances. This paper examines the underlying concepts, assumptions and analytical bases of commonly employed models of the equilibrium real exchange rate and the manner in which they are usually computed (i.e. operationalized) as well as their shortcomings.

Keywords: Equilibrium Real Exchange Rate (ERER); BEER; FEER; PEER; NATREX; Purchasing Power Parity (PPP). (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 2006-08
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