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Timely measurement of real effective exchange rates. Bruegel Working Paper December 2021.

Darvas, Zsolt (2021) Timely measurement of real effective exchange rates. Bruegel Working Paper December 2021. [Working Paper]

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    Abstract

    We demonstrate that short-run real exchange effective rate changes are dominated by nominal effective exchange rate changes, while inflation rates are sticky and contribute little to short-run real exchange rate changes. These observations allow a rather accurate real-time approximation of the real effective exchange rate using actual nominal exchange rate data and forecast inflation data. We measure the approximation error and find it is minor for most countries and sizeable only for a few countries experiencing high and volatile inflation. For a set of countries, the revision in our estimates using real-time data is slightly lower than the revision in World Bank estimates and much lower than International Monetary Fund estimates. By considering two widely studied economic issues, unit root testing in real exchange rates and nominal exchange rate forecasting with the real exchange rate, we find that using a version of real exchange rates based on approximated monthly price level data instead of actual price level data hardly changes the conclusions on unit roots and forecasting. By combining alternative data sources for exchange rates and consumer prices, we calculate up-to-date monthly real effective exchange rates for 177 countries and the euro area. Our dataset, which is frequently updated, includes more than twice as many observations as the second most comprehensive dataset.

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    Item Type: Working Paper
    Subjects for non-EU documents: Other international institutions > IMF
    EU policies and themes > Policies & related activities > economic and financial affairs
    EU policies and themes > Policies & related activities > economic and financial affairs > trade policy
    EU policies and themes > External relations > globalisation/globalization
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Working Papers
    Depositing User: Daniel Pennell
    Official EU Document: No
    Language: English
    Date Deposited: 05 Jan 2022 13:17
    Number of Pages: 33
    Last Modified: 05 Jan 2022 13:17
    URI: http://aei.pitt.edu/id/eprint/103769

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