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Properties of the Fundamental Equilibrium Exchange Rate in Models of the UK Economy

Published online by Cambridge University Press:  26 March 2020

Keith B Church
Keith B Church*
Affiliation:
ESRC Macroeconomic Modelling Bureau at the University of Warwick
*
∗I would like to thank Ken Wallis and John Whitley for their help with, and comments on, this article. I am also grateful to Ray Barrell for several helpful discussions, and for the suppport of the Economic and Social Research Council. The interpretation of these results, however remains my responsibility.
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Abstract

The Fundamental Equilibrium Exchange Rate (FEER) is that value of the real exchange rate that is consistent with macroeconomic equilibriumo This article uses the long-run trade equation elasticities from the models of Her Majesty's Treasury, the National Institute of Economic and Social Research and the Bank of England to examine the FEER calculation. The sensitivity of the results to changes in the key elasticities and to the possibility of a recent improvement in UK trading performance is considered. Historical comparisons are made between the FEER and the actual real exchange rate. All the results suggest that the real exchange rate was above the FEER at the time of ERM entry. The fixing of the nominal exchange rate removes a possible mechanism by which the economy might reach equilibrium and therefore convergence requires a period where UK inflation is lower than that of its trading partners.

Type
Articles
Information
National Institute Economic Review , Volume 141 , August 1992 , pp. 62 - 70
Copyright
Copyright © 1992 National Institute of Economic and Social Research

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Footnotes

The author is a Research Officer at the ESRC Macroeconomic Modelling Bureau at the University of Warwick.

References

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