Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates

CEPN Working Papers No. 2011-06

12 Pages Posted: 26 Sep 2011 Last revised: 13 Nov 2017

Date Written: June 14, 2011

Abstract

The paper investigates if the most popular alternative to the purchasing parity power approach (PPP) to estimate equilibrium exchange rates, the fundamental equilibrium exchange rate (FEER) influences exchange rate dynamics in the long run. For a large panel of industrialized and emerging countries and on the period 1982-2007, we detect the presence of unit roots in the series of real effective exchange rates and in the series of FEERs. We find and estimate a cointegration relationship between real effective exchange rates and FEERs. The results show that the FEER has a positive and significant influence on exchange rate dynamics in the long run.

Keywords: Fundamental equilibrium exchange rates, Panel unit root tests, Global imbalances, Fully modified ordinary least square, Dynamic ordinary least square, Pooled Mean Group

JEL Classification: F00, F31, F32, C23

Suggested Citation

Saadaoui, Jamel, Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates (June 14, 2011). CEPN Working Papers No. 2011-06. Available at SSRN: https://ssrn.com/abstract=1933305 or http://dx.doi.org/10.2139/ssrn.1933305

Jamel Saadaoui (Contact Author)

University of Strasbourg ( email )

61 Avenue de la ForĂȘt Noire
Strasbourg, Alsace 67000
France

HOME PAGE: http://www.jamelsaadaoui.com/

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