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Effective exchange‐rate overvaluation is considered a leading indicator of currency crises. Yet, existing measures of nominal and real effective exchange rates focus on international trade in goods and neglect the importance of international trade in assets. This article develops a range of alternative effective exchange‐rate indices for the Australian dollar, based mostly on international investment stocks and flows. Capital‐weighted exchange‐rate measures of the Australian dollar, in nominal and real terms, reveal a stronger exchange rate over recent decades than suggested by the standard measure. Similar measures for other currencies could improve understanding of exchange‐rate behaviour.

This paper derives optimal effective exchange rates, via loss-function minimization, for the US economy. The results attract considerable research interest; although it is generally believed that policy makers intervene only in infrequent emergency occasions in the foreign exchange market, this paper shows that the contrary is true; the US foreign exchange market is characterized by frequent central bank intervention.

In the era of globalization, global macroeconomic crises and the changes in the international trade pattern have accentuated the need for clearer understanding of the factors underlying a country's balance of trade position. In this onset, this paper examines the short run and long run effect of real effective exchange rate on trade balance of Ethiopia together with other variables that assumed to have effect on trade balance such as real GDP, government consumption, money supply and trade openness. The Autoregressive Distributed Lag (ARDL) Approach is used for analysis time serious annual data of period 1979/80 to 2013/34. Different diagnostic tests are under taken to check this time series data consistency and stability of selected model. As econometrics result reveals that these macro economic variables have short run as well as long run positive and significant effect on trade balance of the country except money supply, which has negative effect in the short run. That is in the short run real GDP , real exchange rate, government expenditure and trade openness have positive effect on trade balance of the country, while money supply has negative effects. Where as in the long run: real GDP, real effective exchange rate, money supply, government consumption and trade openness have significant and positive effect on trade balance. Based on the result I conclude that real effective exchange rate has short as well as long run effect on trade balance. To handle this series effect and reduce this continual deficit on trade balance government have to formulate strong controlling mechanism on monitory policy and trade structure of the country.

Were real effective exchange rates (REER) of Euro area member countries drastically misaligned at the outbreak of the global financial crisis? The answer is difficult to determine because economic theory gives no simple guideline for determining the equilibrium values of real exchange rates, and the determinants of those values might have been distorted as well. To overcome these limitations, we use synthetic matching to construct a counterfactual economy for each member as a linear combination of a large set of non-Euro area countries. We find that Euro area crisis countries are best described by a mixture of advanced and emerging economies. Comparing the actual REER with those of the counterfactuals gives sensible estimates of the misalignments at the start of the crisis: All peripheral countries were strongly overvalued, while high undervaluation is only observed for Finland.

Abstract After the widespread adoption of flexible exchange rate regime since 1973 the volatility of the exchange rate has increased, as a consequence of greater trade openness and financial integration. As a result, it has become difficult to find evidence of the purchasing power parity hypothesis (PPP). This study investigates the possibility of a fall in the persistence of the real exchange rate as a consequence of the financial and commercial integration by employing monthly real effective exchange rate dataset provided by the International Monetary Fund (IMF). Beginning with an exploratory data analysis in the frequency domain, the fractional coefficient d was estimated employing the bias-reduced estimator on a sample of 20 countries over the period ranging from 1975 to 2011. As the main novelty, this study applies a bias-reduced log-periodogram regression estimator instead of the traditional method proposed by GPH which eliminates the first and higher orders biases by a data-dependent plug-in method for selecting the number of frequencies to minimize asymptotic mean-squared error (MSE). Additionally, this study also estimates a moving window of fifteen years to observe the path of the fractional coefficient in each country. No evidence was found of a statistically significant change in the persistence of the real exchange rate.

Movements in exchange rates attract much attention, both for the signals they may contain about future inflation prospects and for their implications for the competitiveness of firms. However, movements in bilateral exchange rates, for instance in sterling against the dollar or the euro, do not convey enough information for either policymakers or for firms except in relation to specific bilateral transactions. It is useful to construct summary measures of exchange rate movements, and there are a number of ways of doing this. The choice of measure depends upon the use to which it is to be put. Some measures, such as the effective exchange rate, are summary indicators, whilst others such as export competitive indices are more relevant when evaluating the prospects for export developments. Some indicators weight together nominal exchange rates. Others are measures of real exchange rates, weighting together exchange rate adjusted relative prices. The indicators chosen should be seen in the context in which they are used.