Cline and Williamson update their estimates of fundamental equilibrium exchange rates (FEERs) for leading advanced and emerging-market economies. This policy brief is a sequel to Policy Brief 08-7, published last July, and is based on the latest developments in the world economy. The authors, refining their methodology from last year, estimate a set of current account targets for 34 countries. On the basis of these estimates, they calculate the bilateral exchange rates against the dollar needed to meet these targets, using Cline's symmetric matrix inversion method (SMIM) first presented in Working Paper 08-6.
The authors 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.
View full document [pdf]
The Dangers of an Overvalued Dollar June 3, 2009
Policy Brief 14-16: Estimates of Fundamental Equilibrium Exchange Rates, May 2014 May 2014
Policy Brief 14-17: Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do June 2014
Policy Brief 13-28: Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis November 2013
Op-ed: Unconventional Monetary Policy: Don't Shoot the Messenger November 14, 2013
Op-ed: Misconceptions About Fed's Bond Buying September 2, 2013
Working Paper 13-2: The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances March 2013
Policy Brief 12-25: Currency Manipulation, the US Economy, and the Global Economic Order December 2012
Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?
Revised August 2013
Policy Brief 12-7: Projecting China's Current Account Surplus April 2012
Working Paper 12-4: Spillover Effects of Exchange Rates: A Study of the Renminbi March 2012
Book: Flexible Exchange Rates for a Stable World Economy October 2011
Policy Brief 10-24: The Central Banker's Case for Doing More October 2010
Policy Brief 10-26: Currency Wars? November 2010
Testimony: Correcting the Chinese Exchange Rate September 15, 2010
Book: Debating China's Exchange Rate Policy April 2008
Policy Brief 07-4: Global Imbalances: Time for Action March 2007
Policy Brief 12-19: Combating Widespread Currency Manipulation July 2012
Working Paper 11-14: Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition September 2011
Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011