Jan Hansen and Werner Roeger
The purpose of this paper is to provide a consistent and transparent theoretical and empirical framework to analyse real effective equilibrium exchange rates for a large number of industrial countries. The theoretical and empirical model, as well as the applied methodology, are closely related to a recently published working paper by the IMF (Alberola et.al (1999)).
In the theoretical part, a macroeconomic model of internal and external equilibrium is presented (chapters 2, 3 and 4). The empirical part estimates a simplified version of the theoretical model and results are thereafter reported and evaluated on a country by country basis (chapter 5). The purpose of the empirical part is not to arrive at point estimates for equilibrium exchange rates, but rather to provide some basic econometric evidence as a complement and illustration of the theoretical analysis. The empirical model and statistical methodology is kept simple and uniform for all countries in order to facilitate interpretation and evaluation of the results.