Real exchange rates

Real exchange rates

Exchange rates that have been adjusted for the inflation differential between two countries.

Real Exchange Rates

The purchasing power of two currencies relative to one another. While two currencies may have a certain exchange rate on the foreign exchange market, this does not mean that goods and services purchased with one currency cost the equivalent amounts in another currency. This is due to different inflation rates with different currencies. Real exchange rates are thus calculated as a nominal exchange rate adjusted for the different rates of inflation between the two currencies. See also: Purchasing power parity.
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2- Studies on developing a model of long-term behaviour of real exchange rates
The IMF calculates RER as a geometric weighted average of bilateral real exchange rates between the home country and its trade partners.
This is true because foreign trade in these countries is 'generally' invoiced in such currencies as the US dollar, the British Pound, and the Euro, therefore, abrupt fluctuations in real exchange rates hurt the confidence of exporters and importers, which in turn accelerates the inflationary pressure.
2012) examine the relationship between real exchange rates and international portfolio flows during the period 1997-2009 for Egypt, Morocco, Nigeria and South Africa.
Demand management should be complemented by microeconomic or institutional actions that improve the economy's structure and raise its potential growth rate for any inflation and real exchange rates.
In the aggregate, relative goods-prices compared across countries are defined as real exchange rates.
Across advanced economies, those countries with more volatile terms of trade also tend to have had more volatile real exchange rates.
So, by the end of March, the central bank was very comfortable with the levels of both the nominal and real exchange rates since there was room for a limited decrease of the nominal exchange rate, allowing some appreciation of the Turkish lira.
Moreover, monetary policy in support of export-led strategies involving the establishment and maintenance of real exchange rates and changes in the real sector that have international consequences generate a similar data trail, making it difficult for policymakers to understand and interpret the world they see.
Large fluctuations in real exchange rates have potential trade balance and policy implications.
Finding a relationship between real exchange rates and real interest rate differentials is one of the important topics in the field of international macroeconomics.
Yet, the breakdown in the Bretton Woods system of fixed exchange rates in the 1970s has resulted in wider fluctuations in both nominal and real exchange rates in both developed and developing countries (Maskus, 1986).

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