A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation, Issue 11521
Several alternative measures of "effective" exchange rates are discussed in the context of their theoretical underpinnings and actual construction. Focusing on contemporary indices and recently developed econometric methods, the empirical characteristics of these differing series are examined, including the exchange rates for the U.S., the euro area and several East Asian countries. The issues that confront the applied economist or policymaker in using the measures of real effective exchange rates available are illustrated in several case studies from current interest: (i) evaluating exchange rate misalignment, (ii) testing the Balassa-Samuelson effect, (iii) estimating the price responsiveness of trade flows, and (iv) assessing the potential impact of competitive devaluations.
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Allows for third Analysis Balassa-Samuelson base year weights bilateral calculated Chinese Chinn Cointegrating Vectors competition Fixed base CPI and PPI CPI deflated series currency deflated measure deflated real exchange Deutsche Bank East Asian effective exchange rate elasticities Emerging Markets equation Equilibrium Exchange Rates estimates exchange rate indices exchange rate measure export price index Figure foreign GDP deflator Hong Kong HP filtered Allows IMF-s imports International Economics J.P. Morgan Japanese yen Journal of International labor cost deflated likelihood ratio test market competition Fixed Menzie Monetary NBER Working Paper nontradables prices OECD Overvaluation PPI Deflated Indices PPI deflated real price of nontradables productivity differentials Purchasing Power Parity real effective exchange real exchange rate relative price Research Ross Levine third market competition trade flows trade weighted exchange Trade weights Index trade-weighted real exchange trading partners U.S. dollar unit labor cost variable weighted exchange rate Zanello