Of course, all things are not equal, so another interpretation is that the current equilibrium exchange rates
will decline further, reflecting the markets pessimism about the UK economys supply-side outlook and future productivity growth.
estimates of the equilibrium exchange rates
for a number of countries,
Williamson, "2009 Estimates of Fundamental Equilibrium Exchange Rates
", Peterson Institute for International Economics Policy Brief 09-10 (Washington, DC: Peterson Institute for International Economics, June 2009); and "Estimates of Fundamental Equilibrium Exchange Rates
, May 2010", Peterson Institute for International Economics Policy Brief 10-15 (Washington, DC: Peterson Institute for International Economics, June 2010); and W.R.
Williamson (2012) "Estimates of Fundamental Equilibrium Exchange Rates
," May 2012, Peterson Institute Working Paper.
Most people who are deranged enough to consider the very social science of estimating equilibrium exchange rates
conclude that the "fair value" for the Euro against the Dollar is around 1.20.
Indeed, the method of using the magnitude of the surplus/deficit to derive equilibrium exchange rates
was pioneered by John Williamson (1994) in the mid-1990s and termed the 'Fundamental Exchange Rate Equilibrium' or FEER.
Taiwan's Council for Economic Planning and Development (CEPD) says 'PPP' is a theory of long-term equilibrium exchange rates
based on relative price levels of two countries.
"Exchange Rate Regimes and Equilibrium Exchange Rates
in East Asia." Revue Economique, 54(5): 1161-82.
The estimates of equilibrium exchange rates
obtained in this round are more favourable than those from the two earlier (normalised) SRER estimates in Bulff and Smidkowa (2005) and (2007), see figure 4.
First, most of these countries are in the process of entering the euro zone, and they therefore need an estimate of equilibrium exchange rates
prior to a permanent link to the euro.
(1994) Estimating Equilibrium Exchange Rates
. Washington: Institute of International Economics.
The difference between these behavioural equilibrium exchange rates
become more pronounced when the degree of currency misalignment is determined.