The Level REER model in the External Balance Assessment (EBA) Methodology
IMF Working Papers, September 13, 2019
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- The Level REER model in the External Balance Assessment (EBA) Methodology
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Bibliographic details
- Authors: Rui Mano, Luca A Ricci, Mauricio Vargas
- Published: September 13, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513511023.001
Overview
- Presents 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.
- Constructs a measure of the level of the REER and offers a panel regression that considers a large number of cross-sectional and time varying factors, guided by the extensive literature.
Model and methodology
- Uses a panel regression to relate the level REER to both cross-sectional determinants and time-series drivers.
- Explicitly accounts for the “much larger cross-sectional variation of the level REER.”
- Compares REER measures based on GDP-deflators and on consumer price indices in explaining time-series variation.
Main findings
- Enhances understanding of the cross-sectional determinants of the level of the REER while taking into account time-series drivers.
- The framework can better explain the time series variation of level REER when these are based on GDP-deflators rather than on consumer price indices.
- The observed differences across price measures “suggest there may be merits to broadening the assessments to include such measures, although further analysis is required.”
Policy implications and recommendations
- The model has been incorporated into the IMF’s external positions assessment methodology, informing exchange rate assessments.
- Consider broadening external position assessments to include REER measures based on GDP-deflators in addition to consumer price indices, subject to further analysis.
Limitations and areas for further research
- Further analysis is required to evaluate the merits of broadening assessments to include GDP-deflator–based REER measures.
- Ongoing research and validation implied by the working-paper format to “elicit comments and to encourage debate.”
Source: The Level REER model in the External Balance Assessment (EBA) Methodology — https://www.imf.org/en/publications/wp/issues/2019/09/13/the-level-reer-model-in-the-external-balance-assessment-eba-methodology-48588
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