Single-Equation Estimation of the Equilibrium Real Exchange Rate

55 Pages Posted: 20 Apr 2016

See all articles by John Baffes

John Baffes

World Bank

Ibrahim Elbadawi

World Bank - Economic Development Institute

Stephen A. O'Connell

Swarthmore College - Economics Department; University of Oxford - Centre for Study of African Economics

Date Written: August 20, 1997

Abstract

An econometric methodology for estimating both the equilibrium real exchange rate and the degree of exchange-rate misalignment.

Estimating the degree of exchange-rate misalignment remains one of the most challenging empirical problems in an open economy. The basic problem is that the value of the real exchange rate is not observable. Standard theory tells us, however, that the equilibrium real exchange rate is a function of observable macroeconomic variables and that the actual real exchange rate approaches the equilibrium rate over time.

A recent strand of the empirical literature exploits these observations to develop a single-equation approach to estimating the equilibrium real exchange rate. Drawing on that earlier work, Baffes, Elbadawi, and O'Connell outline an econometric methodology for estimating both the equilibrium real exchange rate and the degree of exchange-rate misalignment. They illustrate the methodology using annual data from Cote d'Ivoire and Burkina Faso.

This paper - a product of the Development Research Group - is part of a larger effort in the group to investigate the determinants of the real exchange rate.

Suggested Citation

Baffes, John and Elbadawi, Ibrahim and O'Connell, Stephen A., Single-Equation Estimation of the Equilibrium Real Exchange Rate (August 20, 1997). World Bank Policy Research Working Paper No. 1800. Available at SSRN: https://ssrn.com/abstract=620483

John Baffes (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/jbaffes

Ibrahim Elbadawi

World Bank - Economic Development Institute ( email )

1818 H Street
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/ielbadawi

Stephen A. O'Connell

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States
610-328-8107 (Phone)
610-328-7352 (Fax)

HOME PAGE: http://www.swarthmore.edu/SocSci/soconne1/

University of Oxford - Centre for Study of African Economics

Wellington Square
Oxford OX1 3JP
United Kingdom

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