Thus, considering the Turkish case, the graph below can help us predict an equilibrium real exchange rate
and, at the same time, better understand the arguments of Mr.
2) RERM refers to a sustained departure of the real exchange rate (RER) from its long-run equilibrium real exchange rate
On the one hand, it would depreciate the SRER, hence increasing the gap between the equilibrium real exchange rate
and the rate commensurate with a peg to the euro and inflation target.
To impact the equilibrium real exchange rate
, the authorities must resort to real instruments, thus affecting the real equilibrium of the economy.
More recently, Zhang (2001) adopts an equilibrium real exchange rate
approach and the cointegration techniques and finds that investment, government consumption, growth rate of exports, and the degree of openness of the economy to trade are main explanatory factors for the RMB's long-term equilibrium path from the mid-1950s to the mid-1990s.
In a special case of the model, there is no change in the equilibrium real exchange rate
from its initial value as the economy adjusts to the elimination of the trade deficit.
The empirical work relies on the Bank's staff to construct potential output and the equilibrium real exchange rate
, and assumes the other quantities are constants, set equal to the mean value in the sample.
There are many other unobservable variables that monetary policy-makers need to take a view on in order to determine appropriate policy settings, including, for example, the determinants of household saving and consumption decisions, the responsiveness of exports to the exchange rate, and the level of the equilibrium real exchange rate
Zhou (1997) cannot reject a unit root in the real exchange rate for five countries with episodes of high inflation but concludes in favor of stationarity after allowing for structural breaks that represent shifts in the level and/or the time trend of the estimated equilibrium real exchange rate
The underlying assumption is that something - like differences in productivity growth causing differences in the trend relative price of nontraded goods, which are part of the bundles of goods included in the real exchange rate measure - cause the equilibrium real exchange rate
to show a trend.
Exogenous changes in money demand change the equilibrium real exchange rate
in the same manner.