Concepts of Equilibrium Exchange Rates

61 Pages Posted: 19 May 2005

See all articles by Rebecca L. Driver

Rebecca L. Driver

affiliation not provided to SSRN

Peter F. Westaway

Bank of England - Monetary Analysis

Date Written: January 2005

Abstract

This paper explains what is meant by the concept of equilibrium exchange rates. It argues that a variety of equilibrium exchange rates can be defined and their behaviour will vary according to different definitions of the exchange rate, and over short, medium and long-term horizons. It emphasises that the relevance of each type will depend on the question at hand. The behaviour of different measures of the equilibrium exchange rate is explained with reference to a range of theoretical models. The paper explicitly addresses the circumstances under which purchasing power parity, a commonly adopted benchmark for long-run exchange rate movements, is appropriate. The most important purpose of the paper is to provide a taxonomy of the different empirical measures of equilibrium exchange rates that have been derived in the literature. It offers a comprehensive guide to the bewildering array of related acronyms that has sprung up and explains the different contexts in which different equilibrium measures might prove informative.

Keywords: Equilibrium exchange rates, purchasing power parity

JEL Classification: F00, F31, F32, F21, D50

Suggested Citation

Driver, Rebecca L. and Westaway, Peter F., Concepts of Equilibrium Exchange Rates (January 2005). Bank of England Publications Working Paper No. 248. Available at SSRN: https://ssrn.com/abstract=723981 or http://dx.doi.org/10.2139/ssrn.723981

Rebecca L. Driver (Contact Author)

affiliation not provided to SSRN

Peter F. Westaway

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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