Methodology for Current Account and Exchange Rate Assessments

Occasional Papers, December 28, 2001

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Methodology for Current Account and Exchange Rate Assessments

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Bibliographic details

• Authors: G. Russell Kincaid, Martin Fetherston, Peter Isard, Hamid Faruqee
• Published: December 28, 2001
• Series: Occasional Papers
• DOI: https://doi.org/10.5089/9781589060814.084

CGER purpose and motivation

• Primary motivation: identify cases where exchange rates appear to be substantially out of line with medium-run macroeconomic fundamentals.
• Recognizes that such situations can have different interpretations depending on the cyclical positions of economies and other circumstances.
• Work reported is that of the Coordinating Group on Exchange Rate Issues (CGER).

Macroeconomic balance framework

• Assessments of exchange rates among industrial country currencies rely primarily on an application of a macroeconomic balance framework.
• Framework focus: the extent to which the current account positions associated with prevailing exchange rates are consistent with medium-run fundamentals.
• Emphasis on real exchange rates and the saving-investment balance as central determinants in the assessment.

Implications for IMF surveillance

• Substantial discrepancies between exchange rates and their medium-run equilibrium levels, when they emerge, raise two different, however related issues for the IMF to address in its exercise of bilateral and multilateral Surveillance.
• These assessments inform IMF engagement in both bilateral and multilateral contexts.

Core analytical considerations

• Cyclical positions of economies are explicitly recognized as affecting interpretation of exchange rate assessments.
• The methodology provides perspectives on alternative frameworks for assessing exchange rates and the rationale for CGER's general approach.

International Monetary Fund