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A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation

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  • Menzie Chinn

Abstract

Several alternative measures of “effective” exchange rates are discussed in the context of their theoretical underpinnings and construction. Focusing on contemporary indices and recently-developed econometric methods, the empirical characteristics of these differing series are examined for the U.S., the euro area, and several East Asian countries. The issues that confront the applied economist or policymaker in using the measures of real effective exchange rates available are illustrated in several case studies from current interest: (i) evaluating exchange rate misalignment; (ii) testing the Balassa-Samuelson effect; (iii) estimating the price responsiveness of trade flows; and (iv) assessing the potential impact of competitive devaluations. Copyright Springer Science + Business Media, Inc. 2006

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  • Menzie Chinn, 2006. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," Open Economies Review, Springer, vol. 17(1), pages 115-143, January.
    • Handle: RePEc:kap:openec:v:17:y:2006:i:1:p:115-143
    DOI: 10.1007/s11079-006-5215-0
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    More about this item

    Keywords

    real effective exchange rate; overvaluation; competitiveness; stationarity; cointegration; trade balance;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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