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A Fair Exchange? Theory and Practice of Calculating Equilibrium Exchange Rates

Author/Editor: Bayoumi, Tamim | Faruqee, Hamid | Lee, Jaewoo
Authorized for Distribution: December 1, 2005
Electronic Access: Free Full Text (PDF file size is 472KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We develop a theory-based model of equilibrium exchange rates incorporating factors that have been found to matter empirically. The model provides insights into how variables should be measured and what are appropriate cross-country restrictions. We estimate this model using a panel of 12 industrial countries. The model fits the data relatively well, implying relatively fast adjustment to equilibrium and outperforming a random walk at longer horizons. Furthermore, we find that the rate of adjustment depends on the distance from equilibrium, suggesting that part of the explanation for slow adjustment is inaccurate measures of equilibrium.
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Series: Working Paper No. 05/229
Subject(s): Exchange rates | Economic models
Author's keyword(s): Exchange rates | imperfect substitutability | nonlinear convergence
    Published:   December 1, 2005        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2005229   Pages:   28
    Price:   US$15.00 (Academic Rate: US$15.00 )
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