Working Paper: NBER ID: w2950
Authors: Sebastian Edwards
Abstract: This paper deals with three important issues related to real exchange rates. First, it discusses the analytical concept of real exchange rate (RER) placing particular emphasis on providing an operational definition for the equilibrium real exchange rate. Of course, once this concept is defined we can begin to discuss in a meaningful way what we mean by real exchange rate misalignment, or deviations of the actual RER from its equilibrium value. Second, this paper deals with problems associated with measuring real exchange rates. Several proposals are analyzed and the more serious problems encountered when attempting to compute RER's in the developing countries are discussed. And third, I analyze the actual behavior of RER's in a number of developing countries. Here, issues related to the behavior of alternative indexes and to the statistical properties of real exchange rates are emphasized. Additionally, I study the real consequences of increased real exchange rate volatility.
Keywords: Real Exchange Rates; Developing Countries; Equilibrium; Measurement; Volatility
JEL Codes: F31; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real exchange rate misalignment (F31) | economic stability (E63) |
| measurement issues of real exchange rates (F31) | interpretation of economic policies (E65) |
| increased volatility in real exchange rates (F31) | destabilization of economic conditions (F69) |
| higher relative price of tradables (F16) | changes in supply and demand dynamics (J20) |
| changes in supply and demand dynamics (J20) | current account (F32) |