Global imbalances: Should we use fundamental equilibrium exchange rates?

Abstract

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.JEL Classification: C23, F31, F32, F33, F41.

Dealing with the consequences of exchange rate misalignments for macroeconomic adjustments in the EMU

“…In order to determine the FEER, we solve the following equation: where q feer is the fundamental equilibrium exchange rate. In addition, interested readers can find a complete description of the model and the methodology used in Saadaoui ()…”

“…At the world level, the fundamental rates and the actual rates are integrated and cointegrated. In other words, exchange rate misalignments are stationary for a large panel of industrialized and emerging countries over the period spanning from 1982 to 2010 (Saadaoui, ). Nevertheless, for several EMU countries over the period spanning from 1982 to 2011, it seems highly doubtful that the misalignments have been stationary.…”

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

“…It is argued, Barrell and in't Veld [18] (1991), that the relative prices of two countries ''will come into line with FEER sooner or later'', and that the time period is likely to be extended for the ''real misalignment to disappear''. Saadaoui [20] (2015) agrees that the "FEER is related to real exchange rates" over the long term.…”

“…The fundamental equilibrium exchange rate, FEER, is discussed, among other, by Barrell, Gurney and in't Veld [17] (1992) and by Barrell and in't Veld [18] (1991), Britton [9] (1992), and recently (2015) by Saadaoui [20] . It is argued, Barrell and in't Veld [18] (1991), that the relative prices of two countries ''will come into line with FEER sooner or later'', and that the time period is likely to be extended for the ''real misalignment to disappear''.…”

Taux de change d’équilibre et ampleur des désajustements internes à la zone euro

“…Enfin, il existe des éléments empiriques tendant à prouver que les estimations FEER sont un bon prédicteur des taux de change dans le long terme (Saadaoui, 2015).…”