Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates

Jamel Saadaoui

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

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 or 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 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)
JEL-codes: C23 F31 F32 F33 F41 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Journal Article: Global imbalances: Should we use fundamental equilibrium exchange rates? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2013-14

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