Concepts of Equilibrium Exchange Rates

Driver, Rebecca; Westaway, Peter

doi:10.2139/ssrn.723981

Cited by 97 publications

(81 citation statements)

References 55 publications

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“…This is because the estimated trade elasticity (or elasticities) often turns out to be effectively zero (see Goldstein and Khan (1985)). Furthermore, what has been described by Driver and Westaway (2005) as the 'Achilles heel' of the FEER approach is the hysteresis introduced into the FEER due to interest payments on the net foreign asset term. Bayoumi et al (1994) consider this effect in some detail.…”

mentioning

confidence: 99%

Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues*

Égert

Halpern

MacDonald

2006

Journal of Economic Surveys

137

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In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size.JEL: C15, E31, F31, O11, P17.

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confidence: 99%

Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues*

Égert

Halpern

MacDonald

2006

Journal of Economic Surveys

137

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“…Interestingly, Fischer (2004) shows that an alternative, less well-known argument against the validity of PPP, which has been put forward inter alia by Hsieh (1982), Devereux (1997) and Driver/Westaway (2005), implies a two-component structure of real exchange rates similar to that proposed by Engel (2000). In fact, the real exchange rate, by definition, consists of the real exchange rate of a single good and a weighted sum of relative prices between different goods.…”

Section: Introductionmentioning

confidence: 90%

A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications

Fischer

Porath

2009

Empir Econ

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Abstract:Panel unit root tests of real exchange rates -as opposed to univariate tests -usually reject non-stationarity. These tests, however, could be biased if the real exchange rate contained MA roots. Indeed, two independent arguments claim that the real exchange rate, being a sum of a stationary and a non-stationary component, is possibly an ARIMA (1, 1, 1) process. Monte Carlo simulations show, how systematic changes in the parameters of the components, of the test equation and of the correlation matrix affect the size of first and second generation panel unit root tests. Two components of the real exchange rate, the real exchange rate of a single good and a weighted sum of relative prices, are constructed from the data for a panel of countries. Computation of the relevant parameters reveals that panel unit root tests of the real exchange rate are severely oversized, usually much more so than simple ADF tests. Thus, the evidence for PPP from panel unit root tests may be merely due to extreme size biases. Keywords:panel unit root test, purchasing power parity, real exchange rate, Monte Carlo simulation JEL-Classification: F31, C33 Non Technical SummaryIn the last fifteen years, the empirical validity of purchasing power parity (PPP) over the post-Bretton Woods period has been studied extensively. As regards the methodology, unit root tests have been used to investigate whether the real exchange rate is stationary or not. While panel unit root tests usually confirm purchasing power parity, univariate unit root tests reject the PPP hypothesis in most cases. Since they combine information from several time series, panel unit root tests display greater power than univariate unit root tests. For this reason, the issue of whether purchasing power parity holds is widely held to be settled in favour of PPP.The evidence presented in this study challenges conventional wisdom. It is shown that unit root tests are biased in favour of a rejection of the non-stationarity null if they are applied to a variable that is the sum of two components, one of which is stationary Two arguments from the literature are presented, both of which suggest independently that the real exchange rate consists of two such components. Based on one of the theoretical arguments, the data from the OECD's structural analysis database are used to construct the two components for eleven industrial countries. Consistent with the theory, panel unit root tests show that one of the series can be considered stationary, whereas the other most probably is non-stationary. The parameters of the two component model are estimated. For both this particular parameter constellation as well as one taken from the literature, the bias which occurs when panel unit root tests are applied to real exchange rates is determined by using Monte Carlo simulations.It turns out that panel unit root tests of real exchange rates are biased quite substantially in favour of a rejection of the non-stationarity null if a two-component structure is assumed. The large body of empirica...

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“…Among other, the paper (2004) [10] , by Driver and Westaway, provides a thorough discussion and analysis of many exchange rate models. The paper discusses, among other, the models proposed or extended by Williamson [7] (1983), Frankel and Goldstein (1986), Williamson and Miller (1987), Huizinga (1987), Barrell and Wren-Lewis (1989), Currie and Wren-Lewis (1989), Cumby and Huizinga (1990), Wren-Lewis (1992) [11] , MacDonald and Taylor (1992), Frankel (1993), Williamson (1993 and [72] ), Bayoumi et al (1994), Stein [14] (1994), Artis and Taylor (1995), Frankel (1996); Taylor (1995), Stein and Allen (1995), Clark andMacDonald (1997 and, Stein and Paladino (1998), Wadhwan (1999), Groen (2000), MacDonald (2000), Rapach and Wohar (2002).…”

Section: A Longitudinal Review and Critical Analysis Of Literature -Wmentioning

confidence: 99%

“…The paper discusses, among other, the models proposed or extended by Williamson [7] (1983), Frankel and Goldstein (1986), Williamson and Miller (1987), Huizinga (1987), Barrell and Wren-Lewis (1989), Currie and Wren-Lewis (1989), Cumby and Huizinga (1990), Wren-Lewis (1992) [11] , MacDonald and Taylor (1992), Frankel (1993), Williamson (1993 and [72] ), Bayoumi et al (1994), Stein [14] (1994), Artis and Taylor (1995), Frankel (1996); Taylor (1995), Stein and Allen (1995), Clark andMacDonald (1997 and, Stein and Paladino (1998), Wadhwan (1999), Groen (2000), MacDonald (2000), Rapach and Wohar (2002). The models discussed by Driver and Westaway (2004) [10] include the FEER -fundamental equilibrium exchange rate model by Williamson (1983 [7] , 1991 [8] ), and its derivatives and extensions, like the CHEERcapital enhanced (EER) (MacDonald (2000), the ITMEER -intermediate-term model-based EER (Wadhwan (1999)); the BEER -behavioral EER (Clark andMacDonald (1997 and); DEERthe desired EER (Bayoumi et al (1994) and Artis and Taylor (1995)); APEER -atheoretical permanent EER (Huizinga (1987) and Cumby and Huizinga (1990), MacDonald (2000)); and NATREX -natural real exchange rate (Stein [14] (1994), Stein and Allen (1995), Stein and Paladino (1998)).…”

Section: A Longitudinal Review and Critical Analysis Of Literature -Wmentioning

confidence: 99%

A Simple Model for Expected Exchange Rate E(s) of Currency – It is About the Present Not the Future!

2017

International Journal of Managerial Studies and Research

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Concepts of Equilibrium Exchange Rates

Cited by 97 publications

References 55 publications

Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues*

Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues*

A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications

A Simple Model for Expected Exchange Rate E(s) of Currency – It is About the Present Not the Future!

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