The equilibrium real exchange rate: pros and cons of different approaches with application to Latvia

Abstract

This paper studies various approaches to the equilibrium real effective exchange rate estimation, including structural and direct estimation approaches. It shows their strengths and weaknesses with application to the case of Latvia. Despite the approaches differing considerably in terms of their theoretical background and data used they all indicate that the real exchange rate of Latvia after appreciation during the boom years and subsequent adjustment afterwards remained close to its equilibrium level at the end of the sample period, namely at the end of 2010.

Real effective exchange rate misalignment and currency crisis in Iran

“…The Behavioral Equilibrium Exchange Rate (BEER) method was used in this research, as well as in studies conducted by Burkart and Coudert [8], Clark and MacDonald [9], MacDonald and Dias [27], Nouira et al [31], and Burkart and Coudert [8]. The BEER approach evaluates the real effective exchange rate (REER) directly by estimating the long-run relationship between the REER and macroeconomic fundamentals [1]. In this method, the long-run relationship between the REER and macroeconomic variables is estimated.…”

Current Account and Reer Misalignments in Central Eastern EU Countries: An Update Using the Macroeconomic Balance Approach

“…The determinants are the "transfer problem" variables: the trade balance or the cumulative current account (as proxy for the Net Foreign Asset position) as in Lane and Milesi Ferretti (2004) and Ricci et al (2013), as well as the terms of trade and a proxy for the Balassa-Samuelson effect. Recently Ajevskis et al (2012Ajevskis et al ( , 2015 conducted a comprehensive analysis of REER and CA gaps for Latvia only, using several different methods (including the FEER/Macroeconomic balance). Their results indicate that the Latvian REER, after appreciating during the boom years and subsequent adjustment afterwards, was close to its equilibrium level at the end of 2010.…”

Current Account and Reer Misalignments in Central Eastern EU Countries: An Update Using the Macroeconomic Balance Approach

“…There are not many articles based on this minus the equilibrium rate. The determinants are the "transfer problem" variables: the trade balance or the cumulative current account (as proxy for the Net Foreign Asset position) as in Lane and Milesi Ferretti (2004) Recently Ajevskis et al (2012Ajevskis et al ( , 2015 conducted a comprehensive analysis of REER and CA gaps for Latvia only, using several different methods (including the FEER/Macroeconomic balance). Their results indicate that the Latvian REER, after appreciating during the boom years and subsequent adjustment afterwards, was close to its equilibrium level at the end of 2010.…”