Concepts to Calculate Equilibrium Exchange Rates: An Overview

By Ronald R. MacDonald. Social Science Research Network, 2000

249 citations recorded by the source corpus.

In this paper we present a critical overview of differnt methods of constructing an equilibrium exchange rate. The recent literature on purchasing power parity (PPP) indicates that on its own PPP is not a good vehicle for defining an equilibrium exchange rate. Rather, we argue that the latter can only be recover from a model in which the real determinants of exchange rates are explicitly modelled. The advantages and disadvantages of various such models are discussed. In particular, the internal-external balance approach to defining an equilibrium real exchange rate is disccused, and this method is compared to the so-called behavioural equilibrium approach. Finally, an approach which uses purely time series methods to construct an equilibrium exchange rate is also discussed.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/87a6acbf96b159dc0316f8c01f8b32a224609cba

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Citations in the corpus

Asset prices, financial conditions and the transmission of monetary policy (2001, background): “MacDonald (2000) provides a comprehensive survey of all the concepts.”
Towards the Estimation of Equilibrium Exchange Rates for CEE Acceding Countries: Methodological Issues and a Panel Cointegration Perspective (2004, background): “21 For a more thorough discussion of variables that can be included in a BEER framework, see MacDonald 2000, this section draws on Osbat and Schnatz (2002).”
Just How Undervalued is the Chinese Renminbi (2005, unknown): “Clark and MacDonald (2000) focus on the exchange rates of the United States, Canada and the United Kingdom.”
Concepts of equilibrium exchange rates (2005, background): “See MacDonald (1995), Breuer (1994) and Froot and Rogoff (1995) for some recent surveys on PPP.”
Asset Prices and the Conduct of Monetary Policy (2002, background): “If demand factors are the main driving force of asset prices, then asset price movements tend to cause disequilibria in the goods market and should therefore be neutralised by interest rate 7 MacDonald (2000) provides a comprehensive survey of all the concepts for equilibrium real exchange rates.”
Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues (2006, methodology): “In the academic literature the approach has been popularised by Juselius (1991, 1995), Johansen and Juselius (1992), MacDonald and Marsh (1997, 1999) and Juselius and MacDonald (2000).”
Real Exchange Rate Misalignments in the Euro Area (2020, unknown): “…literature in order to operationalise the theoretical concept of the unobservable REER equilibrium value and to derive the resulting misalignment, yet no approach has been found to achieve a superior performance to the others (e.g. MacDonald 2000; Driver and Westaway 2004; Ajevskis et al. 2014).”