Estimating fundamental equilibrium exchange rates: how related are these rates to the actual exchange rate changes during the last decade?

Abstract

This thesis will estimate fundamental equilibrium exchange rates (FEERs) for a set ofcurrencies during the last decade, using a five-country framework. The aim is to see if theresults from FEER estimation can explain medium-term real and nominal exchange ratechanges. I start off by defining the concept of the FEER, and proceed to explain theunderlying mechanisms at play. The framework of the model is then presented, along with myapplication of the model. I will then present the results from my analysis, both in real andnominal terms. The results are followed by an analysis of the problems encountered whileusing the model. The result of the USD/CNY rate is then compared with other similar studies.My results show that FEER estimation provides a good indicator for two of the three bilateralrelationships I have studied in the medium term.