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A New Method of Estimating Equilibrium Real Exchange Rate in Developing Countries

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  • Renhong Wu

Abstract

How to assess the misalignments of real exchange rate in developing countries has been a difficult and unresolved issue. Over the decades, researchers have not found desirable methods to estimate the ¡°Equilibrium Exchange Rate¡±. The Purchasing Power Parity (PPP) approach has limitations, and the fixed or managed floating exchange rate regimes in developing countries make the estimating more difficult. The purpose of this paper is to discuss the limitations of the Macroeconomic Balance approach and the existing PPP approach for estimating equilibrium exchange rate in developing countries, and introduce a new method¨Cthe Adjusted PPP method to assess exchange rate in developing countries. The new method includes the Human Development Index (HDI) to adjust the traditional PPP estimates. By introducing the adjustments of HDI, the big quality differences in non-tradable goods and services between developed and developing countries are adjusted for the exchange rate estimates. Also, as a case study, the paper estimated the exchange rate in China of 1991-2013.

Suggested Citation

  • Renhong Wu, 2016. "A New Method of Estimating Equilibrium Real Exchange Rate in Developing Countries," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(3), pages 171-177, March.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:3:p:171-177
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    References listed on IDEAS

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    Cited by:

    1. Banerjee, Krittika & Goyal, Ashima, 2021. "Behavioural​ equilibrium real exchange rates and misalignments: Evidence from large emerging markets," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 414-436.

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    More about this item

    Keywords

    exchange rate; macroeconomic balance approach; PPP; adjusted PPP; HDI;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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