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Estimates of Fundamental Equilibrium Exchange Rates, November 2017

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  • William R. Cline

    (Peterson Institute for International Economics)

Abstract

The early boost to the dollar following President Donald Trump's election—a Trump "bump"—has been replaced by a Trump "dump." The real effective exchange rate (REER) for the US dollar fell by 6.3 percent from its monthly peak in December 2016 to the October base period used in this study. As a consequence, whereas the dollar was overvalued against its FEER by 8 percent in May, its overvaluation has narrowed to about 4 percent. Through mid-May the dollar's decline could be explained by changes in interest differentials against other major currencies, but thereafter a growing gap emerged in an apparent reflection of increased US political risk, from both domestic political dysfunction (with the failure to repeal the Affordable Care Act) and escalating tension with North Korea. A weaker dollar should help curb the widening of the US trade deficit and potential associated escalation of trade conflict. Cline also evaluates congressional tax reform proposals and estimates the magnitude of the revenue loss as likely to be in the range of 1 percent of GDP annually or less, which suggests that the scope for an upsurge in the dollar from tax reform may be modest rather than massive.

Suggested Citation

  • William R. Cline, 2017. "Estimates of Fundamental Equilibrium Exchange Rates, November 2017," Policy Briefs PB17-31, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb17-31
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    Cited by:

    1. 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.
    2. Jan Priewe, 2018. "A time bomb for the Euro? Understanding Germany's current account surplus," IMK Studies 59-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Bresser-Pereira, Luiz Carlos & Feijó, Carmem & Araújo, Eliane Cristina de, 2022. "The determination of the exchange rate: a new-developmental approach," Textos para discussão 558, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    4. Jan Priewe, 2018. "Germany in fundamental macroeconomic disequilibrium - the external surplus," FMM Working Paper 32-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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