Estimating the Equilibrium Real Exchange Rate: An Application to Finland

September 1, 1997

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

An equilibrium exchange rate is here defined as the level that is consistent with simultaneous internal and external balances as specified in Montiel (1996). Exogenous “fundamental” variables determining these balances are identified. Along the lines of Edwards (1994), a reduced form is estimated with the cointegration technique for Finland for the period 1975-95. The estimation produced a reasonable set of equilibrium exchange rates that appreciate with positive shocks to the terms of trade, world real interest rates, and the productivity differential between Finland and its trading partners.

Subject: Exchange rates, Financial services, Foreign exchange, International trade, Real effective exchange rates, Real exchange rates, Real interest rates, Terms of trade

Keywords: appreciated exchange rate, Baltics, Cointegration, equilibrium exchange rate, equilibrium rate, excess demand, exchange rate, Exchange rates, Finland, goods output, nominal interest rate, productivity differential, Real effective exchange rates, real exchange rate, Real exchange rates, Real interest rates, sector result, Terms of trade, terms of trade shock, WP

Pages:
24
Volume:
1997
DOI:
https://doi.org/10.5089/9781451853179.001
Issue:
109
Series:
Working Paper No. 1997/109
Stock No:
WPIEA1091997
ISBN:
9781451853179
ISSN:
1018-5941

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