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Estimates of Fundamental Equilibrium Exchange Rates, November 2016

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  • William R. Cline

    (Peterson Institute for International Economics)

Abstract

As of mid-November, the US dollar has become overvalued by about 11 percent. The prospect of fiscal stimulus and associated interest rate increases under the new US administration risks still further increases in the dollar. An even stronger dollar would widen the path of growing trade deficits already in the pipeline. As President-elect Donald Trump has attributed trade deficits largely to past trade agreement “disasters,” there is a corresponding risk of escalating trade policy conflict, in a perverse dynamic reminiscent of the initial years of Reaganomics. In October 2016, the base month of this new set of fundamental equilibrium exchange rate (FEER) estimates, the US dollar was overvalued by 8 percent, about the same amount as identified in the three previous issues in this series. The real effective exchange rate (REER) of the dollar in October was 17 percent above its level in mid-2014. Given the two-year lag from the exchange rate signal to the trade outcome, the US current account deficit is on track to widen from 2.7 percent of GDP this year to nearly 4 percent by 2021. The new estimates, all based on October exchange rates, again find a modest undervaluation of the yen (by 3 percent) but no misalignment of the euro and Chinese renminbi. The Korean won is undervalued by 6 percent. Cases of significant overvaluation besides that of the United States include Argentina (by about 7 percent), Turkey (by about 9 percent), Australia (by about 6 percent), and New Zealand (by about 4 percent). A familiar list of smaller economies with significantly undervalued currencies once again shows undervaluation in Singapore and Taiwan (by 26 to 27 percent), and Sweden and Switzerland (by 5 to 7 percent).

Suggested Citation

  • William R. Cline, 2016. "Estimates of Fundamental Equilibrium Exchange Rates, November 2016," Policy Briefs PB16-22, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb16-22
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    Cited by:

    1. Chen, Pei-Fen & Zeng, Jhih-Hong & Lee, Chien-Chiang, 2018. "Renminbi exchange rate assessment and competitors' exports: New perspective," China Economic Review, Elsevier, vol. 50(C), pages 187-205.
    2. Teodor Sedlarski & Ilia Atanasov & Alexandra Korcheva, 2023. "How Much is too Much? An Endogenous Growth Model with an Optimal Level of Informality," Bulgarian Economic Papers bep-2023-02, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Feb 2023.
    3. THORBECKE, Willem, 2016. "China's Electronics Exports, the Renminbi, and Exchange Rates in Supply Chain Countries," Discussion papers 16088, Research Institute of Economy, Trade and Industry (RIETI).

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