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
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: Suggested Citation