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Evaluating Alternative Measures of the Real Effective Exchange Rate

Robert Lafrance, Patrick Osakwe and Pierre St-Amant ()

Staff Working Papers from Bank of Canada

Abstract: This paper discusses the merits and shortcomings of alternative price indices used in constructing real effective exchange rate indices and examines the effects of different weighting schemes. It also compares selected measures of the real effective exchange rate in terms of their ability to explain movements in Canadian net exports and real output. The paper argues that, although different weighting schemes may at times provide useful and complementary information, the choice of a weighting scheme does not, in general, significantly affect on measures of Canada's competitiveness. The choice of a price index is usually the critical factor. In particular, real effective exchange rate indices that are computed using unit labour costs explain movements in Canadian net exports and real output significantly better than those based on consumer price indices.

Keywords: exchange rate; consumer price (search for similar items in EconPapers)
Pages: 29 pages
Date: 1998
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Handle: RePEc:bca:bocawp:98-20