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Estimating the equilibrium real exchange rate : an application to Finland

There is a wealth of theoretical and empirical work on the determinants of the equilibrium real exchange rate. One important strand of the literature is associated with Williamson's seminal work (Williamson 1985), which has its roots in an approach developed at the IMF (Artus 1977).2 Williamson defines the fundamental equilibrium exchange rate, FEER, as the rate that is consistent with the simultaneous achievement of internal and external balance. Internal balance is defined as the level of economic activity that keeps the inflation rate constant. In Williamson's approach, the concept of external balance contains a normative element: the external position is balanced if the external current account (once adjusted for cyclical movements) can be regarded not only as sustainable (that is, meeting the country's intertemporal budget constraint), but also as "appropriate" (for example, based on desired levels of saving and investment). In order to determine the FEER, it is first necessary to formulate an econometric model for the trade sector that captures the relationships among output, current account, demand, and competitiveness. The FEER is then calculated as the exchange rate that maintains internal and external equilibrium. A critical summary of this approach by Black (1994) points out that serious questions remain concerning the normative choices on the model to be used, particularly the target for the current account.

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  • "Equilibrium real exchange rate"@en

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  • "There is a wealth of theoretical and empirical work on the determinants of the equilibrium real exchange rate. One important strand of the literature is associated with Williamson's seminal work (Williamson 1985), which has its roots in an approach developed at the IMF (Artus 1977).2 Williamson defines the fundamental equilibrium exchange rate, FEER, as the rate that is consistent with the simultaneous achievement of internal and external balance. Internal balance is defined as the level of economic activity that keeps the inflation rate constant. In Williamson's approach, the concept of external balance contains a normative element: the external position is balanced if the external current account (once adjusted for cyclical movements) can be regarded not only as sustainable (that is, meeting the country's intertemporal budget constraint), but also as "appropriate" (for example, based on desired levels of saving and investment). In order to determine the FEER, it is first necessary to formulate an econometric model for the trade sector that captures the relationships among output, current account, demand, and competitiveness. The FEER is then calculated as the exchange rate that maintains internal and external equilibrium. A critical summary of this approach by Black (1994) points out that serious questions remain concerning the normative choices on the model to be used, particularly the target for the current account."@en

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  • "Electronic books"@en

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  • "Estimating the equilibrium real exchange rate : an application to Finland"
  • "Estimating the equilibrium real exchange rate : an application to Finland"@en
  • "Estimating the Equilibrium Real Exchange Rate - An Application to Finland"
  • "Estimating the equilibrium real exchange rate an application to Finland"@en
  • "ESTIMATING THE EQUILIBRIUM REAL EXCHANGE RATE : AN APPLICATION TO FINLAND"