Estimating the equilibrium exchange rate in Moldova

Abstract

"The calculation of equilibrium exchange rates (EERs) plays a central role both in international economics and practical policy decisions. For fixed or managed exchange rate regimes, the importance of the EER concept is obvious, since it is needed to guide the determination of concrete numerical targets for the currency value. Notwithstanding, the EER notion is relevant for floating regimes, too. Are sharp movements in the external value of a currency an expression of changes in the respective underlying factors, or do they represent a misalignment? Such an analysis concerns the evaluation of the current level of the market exchange rate in regard of the perspectives for current account adjustments, imported inflation pressures or expected capital flows. Evidently, these topics are among the mostdiscussed points in open macroeconomics. Furthermore, EERs provide crucial information for the conduct of monetary policy. This discussion clarifies the considerable significance of empirical EER calculations for policy makers. Such calculations have been carried out by Weber, Kirchner and Giucci (2010), who employed several methods to quantify the EER of the Moldovan leu. However, due to its presentation format, this work did not include much reference to theory and methodological aspects of the estimations performed. This technical note fills this gap by concentrating on the methods behind our estimations. Having explained this in more detail, in the future other applied researchers are enabled to check the validity, perform similar calculations and update the results. The structure of the technical note is as follows: The following sections introduce and describe the different EER estimation procedures. The two main approaches can be roughly classified by their time horizon: While the External-Sustainability (ES) approach operates in a medium-term framework, the Balance-of-Payments (BoP) methodology offers a medium- to long-term perspective. Section 4 provides some discussion and concludes." (Author's abstract, IAB-Doku) ((en))

Cite article

Weber, E. & Kirchner, R. (2010): Estimating the equilibrium exchange rate in Moldova. (German Economic Team Moldova. Technical Note 01/2010), Berlin, 7 p.