Real Exchange Rate Fundamentals: A Synthesis of the Literature
DOI:
https://doi.org/10.6000/1929-7092.2019.08.36Keywords:
International finance, open economy macroeconomics, economic growth of open economies.Abstract
A general review of approaches to equilibrium real exchange rate was undertaken. The review covered most of the theoretical, methodological and empirical literatures that had been developed in the attempt to overcoming the measurement problems associated with the concept. The distinct approaches reviewed in the paper included, exchange rate equations with nominal and real disturbances, the purchasing power parity doctrine, productivity approach, macroeconomic balance, varieties of exchange rate equation models, and, behavioral equilibrium exchange rate approach. Although the models were generally theory-based and reasonably well motivated, a comprehensive evaluation of the appropriateness of some of the theoretically identified fundamentals might be a most desired status credibility check.
References
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https://doi.org/10.5089/9781557750785.084
Arthukorala, Prema-Chandra and Sarath Rajapatirana. 2003. “Capital Inflow and Real Exchange Rate: A Comparative Study of Asia and Latin America.” World Economy 26(4): 613-637.
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Balassa, Bella. 1964. “The Purchasing-power Parity Doctrine: A Reappraisal.” Journal of Political Economy 72(6): 584-596
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Barajas, Adolfo, Ralph Chami, Dalia S. Hakura and Peter Montiel. 2011. “Workers’ Remittances and the Equilibrium Real Exchange Rates: Theory and Evidence.” Economia 11(2): 45-99.
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Béreau, Sophie, Anthonia L. Villavicencio, and Valerie Mignon. 2010. “Nonlinear Adjustment of the Real Exchange Rate towards its Equilibrium Value: A Panel Smooth Transition Error Correction Modelling.” Economic Modelling 27(1): 404–416.
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Berka, Martin, Michael B. Devereux and Charles Engel. 2014. “Real Exchange Rates and Sectoral Productivity in the Eurozone.” NBER Working Paper No. 20510.
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Bouoiyour, Jamal and Rey, Serge 2005. “Exchange Rate Regime, Real Exchange Rate, Trade Flows and Foreign Direct Investments: The Case of Morocco.” African Development Review 17(2): 302–334
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Cheung, Yin-Wong, Menzie Chinn, and Anthonio G. Pascua. 2005. “Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? Journal of International Money and Finance 24: 1150-75.
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De Gregorio, Jose and Holger C. Wolf. 1994. “Terms of Trade, Productivity and the Real Exchange Rate.” NBER Working Paper No. 4807
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Driver, Rebecca L. and Peter F Westaway. 2004. “Concepts of Equilibrium Exchange Rates.” Bank of England Working Paper No. 248.
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https://doi.org/10.1016/0304-3878(88)90048-X
Edwards, Sebastian and Jonathan D. Ostry. 1990. “Anticipated Protectionist Policies, Real Exchange Rates and the Current Account.” Journal of International Money and Finance 9(2): 206-219.
https://doi.org/10.1016/0261-5606(90)90031-T
Égert, Balazs, Amina Lahrèche-Révil and Kirsten Lommatzsch. 2004. “The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies.” CEPII Working Paper No. 14.
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Elbadawi, Ibrahim A. and Raimundo Soto. 1994. “Capital Flows and Long-term Equilibrium Real Exchange Rates in Chile.” The World Bank Policy Research Working Paper 1306.
Isard, Peter and Hamid Faruque. 1998. “Exchange Rate Assessment: Extension of the Macroeconomic Balance Approach. IMF Occasional Papers, No. 167.
https://doi.org/10.5089/9781557757319.084
Lartey, Emmanuel K. K. 2007. “Capital Inflows and the Real Exchange Rate: An Empirical Study of Sub-Saharan Africa.” The Journal of International Trade and Economic Development: An International and Comparative Review 16(3): 337-357.
https://doi.org/10.1080/09638190701526667
Faruqee, Hamid. 1995. “Long-run Determinants of the Real Exchange Rate: A Stock-flow Perspective.” IMF Staff Papers 42(1): 80-107.
https://doi.org/10.2307/3867341
Fida, B.Ahmad, Muhammad M. Khan and Muhammad K. Sohail. 2012. “Analysis of Exchange Rate Fluctuations and External Debt: Empirical Evidence from Pakistan.” African Journal of Business Management 6(4): 1760-1768.
https://doi.org/10.5897/AJBM11.1283
Ghura, Dhaneshwar and Thomas J. Grennes. 1993. “The Real Exchange Rate and Macroeconomic Performance in Sub-Saharan Africa. Journal of Development Economics 42(1): 155-174.
https://doi.org/10.1016/0304-3878(93)90077-Z
Hyder, Zulfiqar and Adil Mahboob. 2005. “Equilibrium Real Effective Exchange Rate and Exchange Rate Misalignment in Pakistan.” Paper Written for the State Bank of Pakistan Conference 2005 October.
Khan, Mohsin S. and Peter J. Montiel. 1987. “Real Exchange Rate Dynamics in a Small, Primary-exporting Country.” IMF Staff Papers 34(4): 681-710.
https://doi.org/10.2307/3867194
Khan, Mohsin S. and Jonathan D. Ostry. 1992. “Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries.” World Development 20(9): 1325-1334.
https://doi.org/10.1016/0305-750X(92)90081-6
Kilian, Lutz. and Mark P. Taylor. 2003. “Why is it so Difficult to Beat the Random Walk Forecast of Exchange Rates?” Journal of International Economics 60(1): 85–107.
https://doi.org/10.1016/S0022-1996(02)00060-0
Lee, Chia-Hao and Pei-I Chou. 2013. “The Behavior of Real Exchange Rate: Nonlinearity and Breaks.” International Review of Economics and Finance 27(June): 125-133.
https://doi.org/10.1016/j.iref.2012.09.007
MacDonald, Ronald. 2000. “Concepts to Calculate Equilibrium Real Exchange Rate: An Overview.” Discussion Paper Economic Research Group 3/00, Deutsche Bundesbank
MacDonald, Ronald and Luca A. Ricci. 2005. “The Real Exchange Rate and the Balassa– Samuelson Effect: The Role of the Distribution Sector.” Pacific Economic Review 10(1): 29–48.
https://doi.org/10.1111/j.1468-0106.2005.00259.x
Maeso-Fernandez, Francisco, Chiara Osbat and Bernd Schnatz. 2002. “Determinants of Euro Real Effective Exchange Rate.” Australian Economic Papers 41(4): 437-461.
https://doi.org/10.1111/1467-8454.00174
Meese, Richard A. and Kenneth Rogoff. 1983. “Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?” Journal of International Economics 14(1-2): 3-24.
https://doi.org/10.1016/0022-1996(83)90017-X
Montiel, Peter J. 1999a. “The Long-run Equilibrium Real Exchange Rate: Conceptual Issues and Empirical Research.” Pp. 219-263 in Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, edited by L.E. Hinkle and P.J. Montiel. Oxford: Oxford University Press.
Montiel, Peter J. 1999b. “Determinants of the Long-run Equilibrium Real Exchange Rate: An Analytical Model.” Pp. 264-290 in Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, edited by L.E. Hinkle and P.J. Montiel. Oxford: Oxford University Press.
Mussa, Michael L. 1984. “The Theory of Exchange Rate Determination.” Pp. 13-78 in Exchange Rate Theory and Practice edited by J.F.O. Bilson and R.C. Marston. Chicago: University of Chicago Press.
Nilsson, Kristain. 2004. “Do Fundamentals Explain the Behavior of the Swedish Real Effective Exchange Rate?” The Scandinavian Journal of Economics 106(4): 603-622.
https://doi.org/10.1111/j.0347-0520.2004.00379.x
Nurkse, Ragnar. 1945. Conditions on International Monetary Equilibrium. Essays in International Finance 4 (Spring). Princeton, NJ: Princeton University Press.
O’ Connell, Paul G.J. 1998. “The Overvaluation of Purchasing Power Parity.” Journal of International Economics 44(1): 1–19.
https://doi.org/10.1016/S0022-1996(97)00017-2
Ogun, Oluremi. 2019. “Revisiting Real Exchange Rate Fundamentals.” Archaeology and Anthropology Open Access 3(3): 1-6.
https://doi.org/10.31031/AAOA.2019.03.000581
Ok, Selha, Makoto Kakinaka and Hiroaki Miyamoto. 2010. “Real Shock or Nominal Shock? Exchange rate Movements in
Cambodia and Lao PDR.” The Singapore Economic Review 55(4): 685-703.
https://doi.org/10.1142/S0217590810004012
Ostry, Jonathan D. 1991. “Tariffs, Real Exchange Rates and the Trade Balance in a Two-Country World.” European Economic Review 35(5): 1127-1142.
https://doi.org/10.1016/0014-2921(91)90009-8
Oh, Keun-Yeob. 1996. “Purchasing Power Parity and Unit Root Test using Panel Data.” Journal of International Money and Finance 15(3): 405-418.
https://doi.org/10.1016/0261-5606(96)00012-5
Peng, Tao, Lee Minsoo and Christopher Gan. 2008. “Has the Chinese Currency been Undervalued?” Journal of Chinese Economic and Business Studies 6(1): 49-66.
https://doi.org/10.1080/14765280701841375
Salter, Wilfred E. G. 1959. “Internal and External Balance: The Role of Price and Expenditure Effects. Economic Record 35(71): 227-238.
https://doi.org/10.1111/j.1475-4932.1959.tb00462.x
Soto, Raimundo and Ibrahim A. Elbadawi. 2007. “Theory and Empirics of Real Exchange Rates in Developing Countries.” Documentos de Trabajo 324, Instituto de Economia, Pontificia Universidad Cato´ lica de Chile.
Swan, Trevor W. 1956. “Economic Growth and Capital Accumulation.” Economic Record 32(2): 344-361.
https://doi.org/10.1111/j.1475-4932.1956.tb00434.x
Stein, Jerome L. 1994. “The Natural Real Exchange Rate of the US Dollar and Determinants of Capital Flows.” Pp. 133-176 in Estimating Equilibrium Exchange Rates, edited by J. Williamson. Washington, DC: Institute for International Economics.
Stein, Jerome L. 1999. “The Evolution of the Real Value of the US Dollar relative to the G7 Currencies.” Pp. 67-102 in Equilibrium Exchange Rates, edited by R. MacDonald and J. Stein. Amsterdam: Kluwer.
https://doi.org/10.1007/978-94-011-4411-7_3
Samuelson, Paul A. 1964. Theoretical Notes on Trade Problems. The Review of Economics and Statistics 46(2): 145-154.
https://doi.org/10.2307/1928178
Williamson, John. 1985. The Exchange Rate System. Policy Analyses in International Economics 5. Washington, DC: Institute for International Economics.
Williamson, John. 1994. “Estimates of FEERs.” Pp. 177-244 in Estimating Equilibrium Exchange Rates, edited by J. Williamson. Washington, DC: Institute for International Economics
https://doi.org/10.3406/reco.1998.410004
Akram, Q. Farooq. 2004. “Oil Wealth and Real Exchange Rates: The FEER for Norway.” ANO 2004/16 Working Paper. Oslo: Norges Bank.
Amuzegar, Jahangir. 1983. “Oil Exporters’ Economic Development in an Interdependent World.” Occasional Paper, No. 18. Washington, DC: International Monetary Fund.
https://doi.org/10.5089/9781557750785.084
Arthukorala, Prema-Chandra and Sarath Rajapatirana. 2003. “Capital Inflow and Real Exchange Rate: A Comparative Study of Asia and Latin America.” World Economy 26(4): 613-637.
https://doi.org/10.1111/1467-9701.00539
Balassa, Bella. 1964. “The Purchasing-power Parity Doctrine: A Reappraisal.” Journal of Political Economy 72(6): 584-596
https://doi.org/10.1086/258965
Barajas, Adolfo, Ralph Chami, Dalia S. Hakura and Peter Montiel. 2011. “Workers’ Remittances and the Equilibrium Real Exchange Rates: Theory and Evidence.” Economia 11(2): 45-99.
https://doi.org/10.1353/eco.2011.0000
Bénassy-Quéré, Agnes, Sophie Béreau, and Valerie Mignon. 2009. “Robust Estimations of Equilibrium Exchange Rates within the G20: A Panel BEER Approach.” Scottish Journal of Political Economy 56(6): 608-633.
https://doi.org/10.1111/j.1467-9485.2009.00500.x
Béreau, Sophie, Anthonia L. Villavicencio, and Valerie Mignon. 2010. “Nonlinear Adjustment of the Real Exchange Rate towards its Equilibrium Value: A Panel Smooth Transition Error Correction Modelling.” Economic Modelling 27(1): 404–416.
https://doi.org/10.1016/j.econmod.2009.10.007
Berka, Martin, and Michael B. Devereux. 2010. “What Determines European Real Exchange Rates?"" NBER Working Paper 15753.
https://doi.org/10.3386/w15753
Berka, Martin, Michael B. Devereux and Charles Engel. 2014. “Real Exchange Rates and Sectoral Productivity in the Eurozone.” NBER Working Paper No. 20510.
https://doi.org/10.3386/w20510
Bouoiyour, Jamal and Rey, Serge 2005. “Exchange Rate Regime, Real Exchange Rate, Trade Flows and Foreign Direct Investments: The Case of Morocco.” African Development Review 17(2): 302–334
https://doi.org/10.1111/j.1017-6772.2005.00117.x
Cheung, Yin-Wong, Menzie Chinn, and Anthonio G. Pascua. 2005. “Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? Journal of International Money and Finance 24: 1150-75.
https://doi.org/10.1016/j.jimonfin.2005.08.002
Clark, Peter B. and Ronald McDonald. 1998. “Exchange Rate and Economic Fundamentals: A Methodological Comparisons of BEERs and FEERs.” IMF Working Paper 98/67.
https://doi.org/10.5089/9781451961683.001
De Gregorio, Jose and Holger C. Wolf. 1994. “Terms of Trade, Productivity and the Real Exchange Rate.” NBER Working Paper No. 4807
https://doi.org/10.3386/w4807
Driver, Rebecca L. and Peter F Westaway. 2004. “Concepts of Equilibrium Exchange Rates.” Bank of England Working Paper No. 248.
https://doi.org/10.2139/ssrn.723981
Edwards, Sebastian. 1989a. “Exchange Rate Misalignment in Developing Countries.” World Bank Research Observer 4(1): 3-21.
https://doi.org/10.1093/wbro/4.1.3
Edwards, Sebastian. 1989b. Real Exchange Rates, Devaluation and Adjustment: Exchange Rate Policy in Developing Countries. Cambridge, MA: MIT Press.
Edwards, Sebastian. 1988. “Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence from Developing Countries.” Journal of Development Economics 29(3): 311-341.
https://doi.org/10.1016/0304-3878(88)90048-X
Edwards, Sebastian and Jonathan D. Ostry. 1990. “Anticipated Protectionist Policies, Real Exchange Rates and the Current Account.” Journal of International Money and Finance 9(2): 206-219.
https://doi.org/10.1016/0261-5606(90)90031-T
Égert, Balazs, Amina Lahrèche-Révil and Kirsten Lommatzsch. 2004. “The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies.” CEPII Working Paper No. 14.
Elbadawi, Ibrahim A. 1994. “Estimating Long Run Equilibrium Exchange Rates.” Pp. 93-131 in Estimating Equilibrium Real Exchange Rates, edited by J. Williamson. Washington, DC: Institute for International Economics.
Elbadawi, Ibrahim A. and Raimundo Soto. 1994. “Capital Flows and Long-term Equilibrium Real Exchange Rates in Chile.” The World Bank Policy Research Working Paper 1306.
Isard, Peter and Hamid Faruque. 1998. “Exchange Rate Assessment: Extension of the Macroeconomic Balance Approach. IMF Occasional Papers, No. 167.
https://doi.org/10.5089/9781557757319.084
Lartey, Emmanuel K. K. 2007. “Capital Inflows and the Real Exchange Rate: An Empirical Study of Sub-Saharan Africa.” The Journal of International Trade and Economic Development: An International and Comparative Review 16(3): 337-357.
https://doi.org/10.1080/09638190701526667
Faruqee, Hamid. 1995. “Long-run Determinants of the Real Exchange Rate: A Stock-flow Perspective.” IMF Staff Papers 42(1): 80-107.
https://doi.org/10.2307/3867341
Fida, B.Ahmad, Muhammad M. Khan and Muhammad K. Sohail. 2012. “Analysis of Exchange Rate Fluctuations and External Debt: Empirical Evidence from Pakistan.” African Journal of Business Management 6(4): 1760-1768.
https://doi.org/10.5897/AJBM11.1283
Ghura, Dhaneshwar and Thomas J. Grennes. 1993. “The Real Exchange Rate and Macroeconomic Performance in Sub-Saharan Africa. Journal of Development Economics 42(1): 155-174.
https://doi.org/10.1016/0304-3878(93)90077-Z
Hyder, Zulfiqar and Adil Mahboob. 2005. “Equilibrium Real Effective Exchange Rate and Exchange Rate Misalignment in Pakistan.” Paper Written for the State Bank of Pakistan Conference 2005 October.
Khan, Mohsin S. and Peter J. Montiel. 1987. “Real Exchange Rate Dynamics in a Small, Primary-exporting Country.” IMF Staff Papers 34(4): 681-710.
https://doi.org/10.2307/3867194
Khan, Mohsin S. and Jonathan D. Ostry. 1992. “Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries.” World Development 20(9): 1325-1334.
https://doi.org/10.1016/0305-750X(92)90081-6
Kilian, Lutz. and Mark P. Taylor. 2003. “Why is it so Difficult to Beat the Random Walk Forecast of Exchange Rates?” Journal of International Economics 60(1): 85–107.
https://doi.org/10.1016/S0022-1996(02)00060-0
Lee, Chia-Hao and Pei-I Chou. 2013. “The Behavior of Real Exchange Rate: Nonlinearity and Breaks.” International Review of Economics and Finance 27(June): 125-133.
https://doi.org/10.1016/j.iref.2012.09.007
MacDonald, Ronald. 2000. “Concepts to Calculate Equilibrium Real Exchange Rate: An Overview.” Discussion Paper Economic Research Group 3/00, Deutsche Bundesbank
MacDonald, Ronald and Luca A. Ricci. 2005. “The Real Exchange Rate and the Balassa– Samuelson Effect: The Role of the Distribution Sector.” Pacific Economic Review 10(1): 29–48.
https://doi.org/10.1111/j.1468-0106.2005.00259.x
Maeso-Fernandez, Francisco, Chiara Osbat and Bernd Schnatz. 2002. “Determinants of Euro Real Effective Exchange Rate.” Australian Economic Papers 41(4): 437-461.
https://doi.org/10.1111/1467-8454.00174
Meese, Richard A. and Kenneth Rogoff. 1983. “Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?” Journal of International Economics 14(1-2): 3-24.
https://doi.org/10.1016/0022-1996(83)90017-X
Montiel, Peter J. 1999a. “The Long-run Equilibrium Real Exchange Rate: Conceptual Issues and Empirical Research.” Pp. 219-263 in Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, edited by L.E. Hinkle and P.J. Montiel. Oxford: Oxford University Press.
Montiel, Peter J. 1999b. “Determinants of the Long-run Equilibrium Real Exchange Rate: An Analytical Model.” Pp. 264-290 in Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, edited by L.E. Hinkle and P.J. Montiel. Oxford: Oxford University Press.
Mussa, Michael L. 1984. “The Theory of Exchange Rate Determination.” Pp. 13-78 in Exchange Rate Theory and Practice edited by J.F.O. Bilson and R.C. Marston. Chicago: University of Chicago Press.
Nilsson, Kristain. 2004. “Do Fundamentals Explain the Behavior of the Swedish Real Effective Exchange Rate?” The Scandinavian Journal of Economics 106(4): 603-622.
https://doi.org/10.1111/j.0347-0520.2004.00379.x
Nurkse, Ragnar. 1945. Conditions on International Monetary Equilibrium. Essays in International Finance 4 (Spring). Princeton, NJ: Princeton University Press.
O’ Connell, Paul G.J. 1998. “The Overvaluation of Purchasing Power Parity.” Journal of International Economics 44(1): 1–19.
https://doi.org/10.1016/S0022-1996(97)00017-2
Ogun, Oluremi. 2019. “Revisiting Real Exchange Rate Fundamentals.” Archaeology and Anthropology Open Access 3(3): 1-6.
https://doi.org/10.31031/AAOA.2019.03.000581
Ok, Selha, Makoto Kakinaka and Hiroaki Miyamoto. 2010. “Real Shock or Nominal Shock? Exchange rate Movements in
Cambodia and Lao PDR.” The Singapore Economic Review 55(4): 685-703.
https://doi.org/10.1142/S0217590810004012
Ostry, Jonathan D. 1991. “Tariffs, Real Exchange Rates and the Trade Balance in a Two-Country World.” European Economic Review 35(5): 1127-1142.
https://doi.org/10.1016/0014-2921(91)90009-8
Oh, Keun-Yeob. 1996. “Purchasing Power Parity and Unit Root Test using Panel Data.” Journal of International Money and Finance 15(3): 405-418.
https://doi.org/10.1016/0261-5606(96)00012-5
Peng, Tao, Lee Minsoo and Christopher Gan. 2008. “Has the Chinese Currency been Undervalued?” Journal of Chinese Economic and Business Studies 6(1): 49-66.
https://doi.org/10.1080/14765280701841375
Salter, Wilfred E. G. 1959. “Internal and External Balance: The Role of Price and Expenditure Effects. Economic Record 35(71): 227-238.
https://doi.org/10.1111/j.1475-4932.1959.tb00462.x
Soto, Raimundo and Ibrahim A. Elbadawi. 2007. “Theory and Empirics of Real Exchange Rates in Developing Countries.” Documentos de Trabajo 324, Instituto de Economia, Pontificia Universidad Cato´ lica de Chile.
Swan, Trevor W. 1956. “Economic Growth and Capital Accumulation.” Economic Record 32(2): 344-361.
https://doi.org/10.1111/j.1475-4932.1956.tb00434.x
Stein, Jerome L. 1994. “The Natural Real Exchange Rate of the US Dollar and Determinants of Capital Flows.” Pp. 133-176 in Estimating Equilibrium Exchange Rates, edited by J. Williamson. Washington, DC: Institute for International Economics.
Stein, Jerome L. 1999. “The Evolution of the Real Value of the US Dollar relative to the G7 Currencies.” Pp. 67-102 in Equilibrium Exchange Rates, edited by R. MacDonald and J. Stein. Amsterdam: Kluwer.
https://doi.org/10.1007/978-94-011-4411-7_3
Samuelson, Paul A. 1964. Theoretical Notes on Trade Problems. The Review of Economics and Statistics 46(2): 145-154.
https://doi.org/10.2307/1928178
Williamson, John. 1985. The Exchange Rate System. Policy Analyses in International Economics 5. Washington, DC: Institute for International Economics.
Williamson, John. 1994. “Estimates of FEERs.” Pp. 177-244 in Estimating Equilibrium Exchange Rates, edited by J. Williamson. Washington, DC: Institute for International Economics
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2019-08-06
How to Cite
Ogun, O. D. (2019). Real Exchange Rate Fundamentals: A Synthesis of the Literature. Journal of Reviews on Global Economics, 8, 424–436. https://doi.org/10.6000/1929-7092.2019.08.36
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