The Level REER model in the External Balance Assessment (EBA) Methodology

Author/Editor:

Rui Mano ; Carolina Osorio Buitron ; Luca A Ricci ; Mauricio Vargas

Publication Date:

September 13, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper offers an empirical model of the drivers of the level of the Real Effective Exchange Rate (REER) that is now part of the IMF’s methodology for the assessment of external positions, including exchange rates. It constructs a measure of the level of the REER and it offers a panel regression that considers a large number of cross-sectional and time varying factors, guided by the extensive literature. Its main contribution is to enhance our understanding of the cross-sectional determinants of the level of the REER, while taking into account the time-series drivers. The framework accounts for the much larger cross-sectional variation of the level REER, and can better explain the time series variation of level REER when these are based on GDP-deflators rather than on consumer price indices. The latter suggest there may be merits to broadening the assessments to include such measures, although further analysis is required.

Series:

Working Paper No. 2019/192

Subject:

English

Publication Date:

September 13, 2019

ISBN/ISSN:

9781513511023/1018-5941

Stock No:

WPIEA2019192

Pages:

40

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