Estimation of Equilibrium Exchange Rates in the WAEMU: A Robustness Analysis
IMF Working Papers, August 1, 2007
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Bibliographic details
- Authors: Magnus Saxegaard, Stephane Roudet, Charalambos G Tsangarides
- Published: August 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867589.001
Overview
- Research objective: Using the FEER approach to investigate the long-run equilibrium paths of the real effective exchange rates (REERs) of countries in the West African Economic and Monetary Union (WAEMU).
- Motivation: Address econometric estimation uncertainty in modeling equilibrium REERs and exchange rate misalignment.
Methods
- Single-country cointegration techniques:
- Johansen
- ARDL
- Panel-data cointegration techniques:
- FMOLS
- PMG
- Approach emphasis: Complement panel estimates with single-country estimations to account for country-specific characteristics.
Key findings
- Determinants of long-run REER behavior:
- Much of the long-run behavior of REERs in WAEMU countries can be explained by fluctuations in terms of trade, government consumption, investment, and productivity.
- Uncertainty and robustness:
- The use of different econometric techniques suggests that there is significant uncertainty about the path of the underlying equilibrium REERs and the degree of exchange rate misalignment, underscoring the need for robustness analyses in exchange rate modeling.
- Role of panel estimations:
- Results from panel-data cointegration may sometimes be useful, but should always be complemented with single-country estimations to ensure that the results take into account country-specific characteristics.
Policy implications and recommendations
- Perform robustness analyses when modeling equilibrium exchange rates to reflect estimation uncertainty across methods.
- Combine panel-data approaches with single-country estimations to capture country-specific dynamics when assessing equilibrium REERs and misalignment.
- Focus policy analysis on key fundamental drivers identified: terms of trade, government consumption, investment, and productivity.
Source: Magnus Saxegaard, Stephane Roudet, and Charalambos G Tsangarides, "Estimation of Equilibrium Exchange Rates in the WAEMU: A Robustness Analysis", IMF Working Papers (August 1, 2007).