A Medium-Term Framework for Analyzing the Real Exchange Rate, with Applications to the Philippines and Tanzania |
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| Authors: | Krumm Kathie L |
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| Institution: | Kathie L. Krumm is in the Office of the Vice President for the Europe and Central Asia Region of the World Bank. This article is based on work done for the Philippines Country Economic Memorandum and Tanzanian Multisector Rehabilitation Credit in 1986. The author wishes to thank Vittorio Corbo, Issbel Guerrero, Daniel Kaufmann, Enrique Rueda-Sabater, and many Philippine and Tanzanian officials and researchers for helpful discussions. Marinela Dado and Francis Ng provided excellent research assistance. |
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| Abstract: | A competitive official real exchange rate is important to externalbalance and sustainable medium-term growth in developing countries.This article presents a methodology for estimating the appropriatereal rate and provides a basis for evaluating the extent towhich the prevailing rate is misaligned. In particular, themedium-term equilibrium real exchange rate is evaluated by estimatingthe effects of structural factors on the trend observed fora country's real rate compared with the rates of its major tradingpartners, taking into account the effects of macroeconomic policy.Structural factors include terms of trade, external capitalflows, and trade policy, plus other factors relevant to thecircumstances of individual countries. The implied change inthe medium-term equilibrium real rate is compared with thatof a historical reference period. The application of this methodologyto two developing countries, the Philippines and Tanzania, illustrateshow it can complement and improve upon other analytic approaches,such as those using purchasing power parity and analysis ofparallel rates. This approach is complemented by an analysisof the relation between a country's real exchange rate and thoseof its major competitors. |
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