Real Exchange Rate and Real Effective Exchange Rate Measurement: Some theoretical Extensions

ibrahim, waheed and Jimoh, Ayodele (2012): Real Exchange Rate and Real Effective Exchange Rate Measurement: Some theoretical Extensions. Forthcoming in:

Abstract

ABSTRACT The paper has provided theoretical extensions to the computations of nominal effective exchange rate and the real effective exchange rate over time. The extension took cognizance of the common base currency (USD) to which all currencies of the world is usually converted. The paper compared its computations with that of the CBN computations in attempt to provide a litmus test on the extensions. It was observed that the two computations were of preserving order with a very high correlation coefficient between the two computations. However, it was observed that the extensions perform better as it’s reflects more of changes in exchange rate of Nigerian economy. The difference was attributed to the increased in the number of trading partners that was involved in the latter. At the end from the result obtained, the paper recommends that the extension should always be taken into considerations in the computations of effective exchange rate especially for the developing nations like Nigeria; also, Central banks of these countries should endeavour to include as many trading partners as possible into their computations. The paper believes that until this done, their effective rates computations may not reflect the actual changes in the exchange rate of their respective countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Keywords: nominal, Real, Effective rates, CBN, correlation coefficients, trading partners
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Chinn, M.D (2002) “ A Measurement of Real Effective Exchange Rates: A Survey and Applications to East Asia” NBER working paper. No 235

Chinn(2006) “A primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade flows and Competitive Devaluation”. Open economies review. 17:115-143.

Elbadawi, I.A and O. Connell (1997) “Real exchange Rates and Macroeconomic Adjustment in Sub-Saharan Africa and other developing countries” Journal of African Economies; 6 (3) supplement.

Ibrahim, W (2012) “Effects of real exchange rate misalignment on macroeconomic performance in Nigeria” An unpublished PhD. Thesis, submitted to the department of economics, university of Ilorin. Nigeria.

Isard P.(2007) “ Equilibrium Exchange Rates: Assessment Methodologies”. IMF working paper WP/07/216

Jimoh A. (2006) Exchange Rate Regimes and Divergence from Equilibrium Real Exchange Rate, Evidence from Nigeria”. Asian-African Journal of Economics and Econometrics. Vol.6. No 2.

Jongwanich, J (2009) “Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia” Asian Development Bank working paper series No.151.

Koch, E.B (1984) “The measurement of Effective Exchange Rates” BIS working paper No 10.

Krugman, P.R and M.Obsfeld (2004) International Economics: theory and policy. Sixth edition. Pearson Education Ltd. Indian.

Qayyum, A., M.A. Khan and K.U. Zaman (2004) “Exchange Rate Misalignment in Pakistan: Evidence from Purchasing Power Parity theory”. The Pakistan Development Review, 43 :4 part 11

Sundararajan V., M. Lazare and S. Williams (1999) “Exchange Rate Unification, the Equilibrium Real Exchange Rate, and Choice of Exchange Rate Regime: The case of the Islamic Republic of Iran. IMF working paper. WP/99/15