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Open Economies Review

, Volume 17, Issue 1, pp 115–143 | Cite as

A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation

Review Essay

Abstract

Several alternative measures of “effective” exchange rates are discussed in the context of their theoretical underpinnings and construction. Focusing on contemporary indices and recently-developed econometric methods, the empirical characteristics of these differing series are examined for the U.S., the euro area, and several East Asian countries. The issues that confront the applied economist or policymaker in using the measures of real effective exchange rates available are illustrated in several case studies from current interest: (i) evaluating exchange rate misalignment; (ii) testing the Balassa-Samuelson effect; (iii) estimating the price responsiveness of trade flows; and (iv) assessing the potential impact of competitive devaluations.

Keywords

real effective exchange rate overvaluation competitiveness stationarity cointegration trade balance 

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Copyright information

© Springer Science + Business Media, Inc. 2006

Authors and Affiliations

  1. 1.Robert M. LaFollette School of Public Affairs, Department of EconomicsUniversity of Wisconsin at Madison, and National Bureau of Economic ResearchMadison

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