Fundamental Equilibrium Exchange Rates (FEERs): Estimates for 2009
William R. Cline, Peterson Institute
John Williamson, Peterson Institute
Peterson Institute for International Economics, Washington, DC
June 3, 2009
The Peterson Institute hosted the second meeting in its series on estimates of fundamental equilibrium exchange rates (FEERs) for major countries on June 3, 2009. Senior fellows William R. Cline and John Williamson presented new estimates for all industrial nations along with key emerging markets including Brazil, China, India, Mexico, and South Korea. This series of FEERs analyses is part of the Institute's effort to help provide guidance for both market participants and public policies.
Cline and Williamson find significant changes in calculated FEERs from their estimates last year. These changes are due in part to the world financial crisis, which created a significant safe-haven effect for the dollar and led to sharp declines in oil prices. As a result of these developments, the dollar has returned to significant overvaluation of about 17 percent: Every currency examined needs to appreciate against the dollar. While some imbalances with Europe have reemerged since last year, the major imbalance remains vis-à-vis certain Asian currencies, particularly the Chinese renminbi, which needs to rise by about 20 percent on a trade-weighted average basis and by about 40 percent against the dollar. Finally, the authors compare their 2009 FEERs estimates with their estimates from last year in order to assess the accuracy and validity of FEERs estimation.
Williamson pioneered the concept of FEERs, which have become widely used in both official and private circles, over the past 25 years. Cline has built and extensively deployed models of international current account imbalances since the late 1980s. They are now combining these methodologies to produce a consistent set of global current account norms and the exchange rates that could achieve and maintain them. Cline and Williamson described their methodologies and presented their conclusions, which take into account the impact of the current crisis and the prospects for recovery from it.