Framework for Deriving Real Exchange Rates

Usman A. Afridi, Rehana Siddiqui


In the last conference we presented a study on Purchasing
Power Parity (PPP) and Real Exchange Rates (RER). One of the conclusions
we reached was that a PPP-based measure of the RER did not give
sufficient insight into the structural problems underlying
disequilibrium situation for Real Exchange Rates. We present a review of
recent studies which model the path of Real Exchange Rates determined by
sets of determinants. These determinants are usually difficult to
quantify and are often represented by proxies. We have reservations
about both the choice of some determinants and also appropriativeness of
the proxies used to represent them. The purpose of this paper is to
critically evaluate frameworks for determining real exchange rates in
developing countries. We would suggest a basis for estimation of RER and
its equilibrium path.

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