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Estimates of Fundamental Equilibrium Exchange Rates, May 2015

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  • William R. Cline

    (Peterson Institute for International Economics)

Abstract

Plummeting oil prices combined with asymmetric phasing of quantitative easing (QE) in the United States versus the euro area and Japan has prompted unusually large changes in major exchange rates over the past year. New estimates of fundamental equilibrium exchange rates (FEERs) find the major currencies are now misaligned, with the US dollar moderately overvalued and the euro and yen modestly undervalued. However, the Chinese yuan is no longer undervalued. Just over half of the 34 economies followed in this series experienced changes in real effective exchange rates (REERs) of about 6 percent or more from April 2014 to April 2015. The most important changes were the large effective appreciations by the US dollar (about 12 percent) and the Chinese yuan (about 12 percent), and the large effective depreciations of the euro (about 11 percent) and the yen (about 8 percent). Although the dollar has risen to about 8 percent above its FEER, it is too early to conclude that any adverse effects of the stronger dollar outweigh the benefits associated with stimulus to global growth from additional QE in the euro area and Japan. However, if the dollar were to continue along a path of further strengthening, the associated distortions could prove counterproductive for both the United States and the world economy at some point.

Suggested Citation

  • William R. Cline, 2015. "Estimates of Fundamental Equilibrium Exchange Rates, May 2015," Policy Briefs PB15-8, Peterson Institute for International Economics.
    • Handle: RePEc:iie:pbrief:pb15-8
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    References listed on IDEAS

    as
    1. Congressional Budget Office, 2015. "The Budget and Economic Outlook: 2015 to 2025," Reports 49892, Congressional Budget Office.
    2. William R. Cline, 2008. "Estimating Consistent Fundamental Equilibrium Exchange Rates," Working Paper Series WP08-6, Peterson Institute for International Economics.
    3. Bosworth, Barry & Collins, Susan M., 2010. "Rebalancing the US Economy in a Postcrisis World," ADBI Working Papers 236, Asian Development Bank Institute.
    4. William R. Cline, 2014. "Estimates of Fundamental Equilibrium Exchange Rates, November 2014," Policy Briefs PB14-25, Peterson Institute for International Economics.
    5. William R. Cline & John Williamson, 2012. "Estimates of Fundamental Equilibrium Exchange Rates, May 2012," Policy Briefs PB12-14, Peterson Institute for International Economics.
    6. Grégory Claeys & Alvaro Leandro & Allison Mandra, 2015. "European Central Bank quantitative easing- the detailed manual," Policy Contributions 872, Bruegel.
    7. Congressional Budget Office, 2015. "An Update to the Budget and Economic Outlook: 2015 to 2025," Reports 50724, Congressional Budget Office.
    8. William R. Cline & John Williamson, 2009. "2009 Estimates of Fundamental Equilibrium Exchange Rates," Policy Briefs PB09-10, Peterson Institute for International Economics.
    9. William R. Cline, 2014. "Estimates of Fundamental Equilibrium Exchange Rates, May 2014," Policy Briefs PB14-16, Peterson Institute for International Economics.
    10. Congressional Budget Office, 2015. "The Budget and Economic Outlook: 2015 to 2025," Reports 49892, Congressional Budget Office.
    11. William R. Cline & John Williamson, 2008. "New Estimates of Fundamental Equilibrium Exchange Rates," Policy Briefs PB08-7, Peterson Institute for International Economics.
    12. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993, April.
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    Citations

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    Cited by:

    1. Yin†Wong Cheung & Menzie Chinn & Xin Nong, 2017. "Estimating currency misalignment using the Penn effect: It is not as simple as it looks," International Finance, Wiley Blackwell, vol. 20(3), pages 222-242, December.
    2. Yin-Wong Cheung & Cho-Hoi Hui & Andrew Tsang, 2017. "The RMB Central Parity Formation Mechanism after August 2015: A Statistical Analysis," Working Papers 062017, Hong Kong Institute for Monetary Research.
    3. Yin-Wong Cheung & Cho-Hoi Hui & Andrew Tsang, 2016. "The Renminbi Central Parity: An Empirical Investigation," Working Papers 102016, Hong Kong Institute for Monetary Research.
    4. Yin-Wong Cheung & Cho-Hoi Hui & Andrew Tsang, 2016. "The Renminbi Central Parity: An Empirical Investigation," Working Papers 102016, Hong Kong Institute for Monetary Research.
    5. Cheung, Yin-Wong & Hui, Cho-Hoi & Tsang, Andrew, 2018. "The RMB central parity formation mechanism: August 2015 to December 2016," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 223-243.
    6. Jan Priewe, 2016. "The enigmatic dollar-euro exchange rate and the world's biggest forex market - performance, causes, consequences," IMK Studies 49-2016, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    7. William R. Cline, 2015. "Estimates of Fundamental Equilibrium Exchange Rates, November 2015," Policy Briefs PB15-20, Peterson Institute for International Economics.
    8. Frankel, Jeffrey, 2015. "The Plaza Accord, 30 Years Later," Working Paper Series 15-056, Harvard University, John F. Kennedy School of Government.
    9. 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.
    10. Coppola,Andrea & Lagerborg,Andresa & Mustafaoglu,Zafer, 2016. "Estimating an equilibrium exchange rate for the Argentine Peso," Policy Research Working Paper Series 7682, The World Bank.
    11. repec:zbw:bofitp:2017_007 is not listed on IDEAS

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