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Evaluating Alternative Measures of the Real Effective Exchange Rate

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  • Robert Lafrance
  • Patrick Osakwe
  • Pierre St-Amant

Abstract

This paper discusses the merits and shortcomings of alternative price indices used in constructing real effective exchange rate indices and examines the effects of different weighting schemes. It also compares selected measures of the real effective exchange rate in terms of their ability to explain movements in Canadian net exports and real output. The paper argues that, although different weighting schemes may at times provide useful and complementary information, the choice of a weighting scheme does not, in general, significantly affect on measures of Canada's competitiveness. The choice of a price index is usually the critical factor. In particular, real effective exchange rate indices that are computed using unit labour costs explain movements in Canadian net exports and real output significantly better than those based on consumer price indices.

Suggested Citation

  • Robert Lafrance & Patrick Osakwe & Pierre St-Amant, 1998. "Evaluating Alternative Measures of the Real Effective Exchange Rate," Staff Working Papers 98-20, Bank of Canada.
    • Handle: RePEc:bca:bocawp:98-20
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    References listed on IDEAS

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    1. Mark Kruger & Patrick N. Osakwe & Jennifer Page, 2000. "Fundamentals, Contagion and Currency Crises: An Empirical Analysis," Development Policy Review, Overseas Development Institute, vol. 18(3), pages 257-274, September.
    2. Patrick N. Osakwe & Shouyong Shi, 2004. "International Borrowing, Specialization, and Unemployment in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 41-59, February.
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    Cited by:

    1. Gabriel Bruneau & Kevin Moran, 2017. "Exchange rate fluctuations and labour market adjustments in Canadian manufacturing industries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(1), pages 72-93, February.
    2. M. Nakorji & E. Udeaja & F. Ismail & S. Zimboh & T. Obiezue & O. Asuzu, 2019. "Computation of the Real Effective Exchange Rate (REER) using the Bank for International Settlement (BIS) Methodology," Economic and Financial Review, Central Bank of Nigeria, vol. 57(3), August.
    3. Jan Gottschalk & Carl Miller & Lanieta Rauqeuqe & Isoa Wainiqolo & Yongzheng Yang, 2016. "The Real Exchange Rate: Assessment and Trade Impact in the Context of Fiji and Samoa," IMF Working Papers 2016/168, International Monetary Fund.
    4. Rey, Serge, 2001. "Les taux de change bilatéraux adoptés pour l’entrée dans l’euro sont-ils des taux d’équilibre?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(1), pages 75-112, mars.
    5. Lucio Sarno, 2005. "Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(3), pages 673-708, August.
    6. Bergvall, Anders, 2002. "The Stabilizing Properties of Floating Exchange Rates: Some International Evidence," Working Paper Series 2002:14, Uppsala University, Department of Economics.
    7. Peter Wilson & Henry Ng Shang Ren, 2007. "The Choice of Exchange Rate Regime and the Volatility of Exchange Rates after the Asian Crisis: A Counterfactual Analysis," The World Economy, Wiley Blackwell, vol. 30(11), pages 1646-1661, November.
    8. Peter Wilson & Henry Shang Ren Ng, 2009. "Managing Exchange Rate Volatility: A Comparative Counterfactual Analysis Of Singapore, 1994–2003," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 54(04), pages 543-568.
    9. Christa Magerl & Peter Mooslechner, 2006. "Revised and New Competitiveness Indicators for Austria Reflect Improvement Trend since EMU Accession," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 70-97.
    10. Peter Wilson & Henry Ng Shang Ren, 2006. "Managing Exchange Rate Volatility: A Comparative Counterfactual Analysis of Singapore 1994 to 2003," SCAPE Policy Research Working Paper Series 0608, National University of Singapore, Department of Economics, SCAPE.
    11. Carlos A.Huertas Campos & Consuelo Villalba Torres & Julián A.Parra Polanía, 2004. "Índice de Competitividad Colombiana con Terceros Países en el Mercado Estadounidense (ITCR-C)," Borradores de Economia 273, Banco de la Republica de Colombia.
    12. Peter Wilson & Henry Ng Shang Ren, 2006. "Managing Exchange Rate Volatility : A Comparative Counterfactual Analysis Of Singapore 1994 To 2003," Macroeconomics Working Papers 22584, East Asian Bureau of Economic Research.
    13. Walpurga Köhler-Töglhofer & Christa Magerl, 2013. "Revision of Price/Cost Competitiveness Indicators for Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 93-119.
    14. Razek, Noha H.A. & McQuinn, Brian, 2021. "Saudi Arabia's currency misalignment and international competitiveness, accounting for geopolitical risks and the super-contango oil market," Resources Policy, Elsevier, vol. 72(C).
    15. Nilsson, Kristian, 1999. "Alternative Measures of the Swedish Real Effective Exchange Rate," Working Papers 68, National Institute of Economic Research.
    16. Peter Wilson, 2007. "Exchange Rate Cooperation in East Asia – Why a Basket Approach may be best," Macroeconomics Working Papers 22586, East Asian Bureau of Economic Research.
    17. Serge Rey, 2001. "Les taux de change bilatéraux adoptés pour l’entrée dans l’Euro sont-ils des taux d’équilibre? Une tentative de réponse à l’aide de la parité des pouvoirs d’achat et de la parité des coûts," Post-Print hal-01885323, HAL.
    18. Ms. Jayasri Dutta, 2002. "Dread of Depreciation: Measuring Real Exchange Rate Interventions," IMF Working Papers 2002/063, International Monetary Fund.
    19. Forsyth, Peter & Dwyer, Larry, 2010. "Exchange rate changes and the cost competitiveness of international airlines: The Aviation Trade Weighted Index," Research in Transportation Economics, Elsevier, vol. 26(1), pages 12-17.
    20. Walpurga Köhler-Töglhofer & Christa Magerl & Peter Mooslechner, 2006. "Revised and New Competitiveness Indicators for Austria Reflect Improvement Trend since EMU Accession," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/06, pages 70-97.
    21. Ursula Glauninger & Thomas Url, 2017. "Revised competitiveness indicators for Austria reflect a comparatively stable competitiveness development of the Austrian economy over the longer horizon," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/17, pages 73-110.

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    Keywords

    exchange rate ; consumer price;

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