Working Paper: CEPR ID: DP323
Authors: Ray Barrell; Simon Wren-Lewis
Abstract: The Fundamental Equilibrium Exchange Rate (FEER) is the real exchange rate which produces a current account that is exactly matched by equilibrium medium-term capital flows. This paper sets out a small model to calculate FEERs for the G7 from 1971 to 1988. This model's parameters are either directly estimated or derived from the long-run properties of a larger world econometric model, GEM. Particular attention is paid to feedbacks from the FEER to the NAIRU, and interactions between world output, trade and commodity prices.
Keywords: current account sustainability; internal balance
JEL Codes: 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FEER (I20) | current account balance (F32) |
| FEER (I20) | sustainable exchange rate (F31) |
| sustainable exchange rate (F31) | balance of payments (F30) |
| structural capital flows (F32) | trend current account (F32) |
| changes in portfolio preferences and returns on domestic vs. overseas assets (G15) | structural capital flows (F32) |
| structural capital flows (F32) | FEER (I20) |