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Global imbalances: Should we use fundamental equilibrium exchange rates?

Jamel Saadaoui ()
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Jamel Saadaoui: BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique

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Abstract: The reduction of global imbalances observed during the climax of crisis is incomplete. In this context, currencies' realignments are still proposed to ensure global macroeconomic stability. These realignments are based on equilibrium rates derived from equilibrium exchange rate models. Among these models, we have the fundamental equilibrium exchange rate model introduced by Williamson (1994). This approach is often labelled as normative mainly because the equilibrium is not uniquely determined. If the FEER is not related either in the short run or in the long run to the real exchange rates, we see no clear justification to intervene in foreign exchange markets based on these equilibrium rates. In this case, the FEER does not include any element of long run predictive value and should not be used to reduce global imbalances. This paper provides panel empirical evidences that the FEER is related to real exchange rate in the long run and thus could be a useful tool to prevent the resurgence of large global imbalances and associated risks.

Keywords: Global imbalances; Equilibrium exchange rate; International monetary cooperation (search for similar items in EconPapers)
Date: 2015-03-12
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01397567
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Published in Economic Modelling, Elsevier, 2015, 47, 〈http://www.sciencedirect.com/science/article/pii/S0264999315000243〉. 〈10.1016/j.econmod.2015.02.007〉

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01397567

DOI: 10.1016/j.econmod.2015.02.007

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