Abstract
This paper examines whether there is a tendency for actual exchange rates to return to their fundamental equilibrium exchange rates (FEERs) when the latter are estimated based on popular exchange rate models. Co-integration tests and unit root tests are applied. There is little evidence that the exchange rates of Japan and Germany have a reversion to the purchasing-power-parity (PPP) rates or Williamson's FEERs or the underlying external and internal balance (UEI) FEERs.
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Zhou, S. Fundamental equilibrium exchange rates and exchange rate dynamics. Open Econ Rev 4, 189–209 (1993). https://doi.org/10.1007/BF01000519
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DOI: https://doi.org/10.1007/BF01000519