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.
