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Misalignment, Debt Accumulation and Fundamental Equilibrium Exchange Rates

Published online by Cambridge University Press:  26 March 2020

Michael J. Artis  and
Mark P. Taylor
Michael J. Artis
Affiliation:
European University Institute, Florence and Centre for Economic Policy Research
Mark P. Taylor
Affiliation:
University of Liverpool and Centre for Economic Policy Research
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Abstract

This article deals with hysteresis in the fundamental equilibrium exchange rate (FEER) arising from misalignment. When the actual real exchange rate departs from its FEER value, current account realisations—and consequently, debt service obli gations—will differ from those assumed in the initial FEER calculation, necessitating its recomputation. The article derives a formal expression for this hysteresis effect in the FEER, and derives and applies rules of thumb for computing the hysteresis effect when considering the rate of approach of an exchange rate toward its FEER value.

Type
Articles
Information
National Institute Economic Review , Volume 153 , August 1995 , pp. 73 - 83
Copyright
Copyright © 1995 National Institute of Economic and Social Research

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