Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates?

Jamel Saadaoui

MPRA Paper from University Library of Munich, Germany

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 (FEER) model introduced by Williamson (1994). This approach is often labelled as normative mainly because the return to the equilibrium is not described in the model. If the FEER is not related neither in the short nor in the long 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 is a normative approach and should not be used to reduce global imbalances. This paper provides empirical evidences robust to cross-sectional dependence 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)
JEL-codes: C23 F31 F32 F41 (search for similar items in EconPapers)
Date: 2012-11-10
New Economics Papers: this item is included in nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates? (2012)
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