Equilibrium Exchange Rates: Assessment Methodologies

IMF Working Papers, December 1, 2007

Source details

Describes six different methodologies that have been used to assess the equilibrium values of exchange rates and discusses their limitations.
Applies several of the approaches to data for the United States as of 2006.
Illustrates that different approaches sometimes provide substantially different assessments.
Asks which methodologies deserve the most weight when approaches disagree.
Argues that while it is generally desirable to consider implications of several different approaches, since different approaches provide different types of perspectives, two of the methodologies seem particularly relevant for identifying threats to macroeconomic stability and growth.

Multiple methodologies can yield substantially different assessments of equilibrium exchange rates.
Considering several approaches is generally desirable because each approach provides a different perspective.
Two of the six methodologies are singled out as particularly relevant for identifying threats to macroeconomic stability and growth (the paper does not name them in this summary).

Several of the methodologies are applied to U.S. data as of 2006.
The empirical application is used to illustrate divergence across methods and to motivate discussion on how to weigh differing assessments.

The paper discusses limitations of each of the six methodologies (details of limitations are in the paper itself).
The divergence across methods raises the question of which methodologies deserve the most weight in policy and assessment contexts.