real exchange rate


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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.

real exchange rate

the EXCHANGE RATE of a currency expressed in constant price terms to make allowance for the effects of INFLATION. For example, where a country experiences a higher rate of domestic inflation than its trade competitors, then its exports will become more expensive than those of competitors’ exports and its imports cheaper than domestic products, unless its exchange rate depreciates to offset fully the inflation differential. In situations where exchange rates are fixed by international agreement or determined by market forces that do not reflect relative inflation rates, then nominal exchange rates can differ significantly from real exchange rates. A country's real exchange rate is the more important measure of that country's INTERNATIONAL COMPETITIVENESS. See PURCHASING-POWER PARITY THEORY.
References in periodicals archive ?
Following previous studies from the literature, in this article I restrict attention to the real exchange rate as an additional variable that central banks in open economies may respond to when conducting monetary policy.
Further research is needed on the relationship between the capital inflow and appreciation of the real exchange rate, on the one hand, and the growth of output, consumption and investment, on the other hand.
Therefore, even if the real exchange rate converges to its balanced level, the price ratio of Chinese and U.S.
Previous studies in the literature have either used the variance and/or standard deviation of the real exchange rate to measure its volatility or resort to employing GARCH family models to achieve the same purpose.
As for studies that empirically argued the interrelation between macroeconomic variables and their imbalances in Egypt, Ramly, and Halim (2008) studied the interrelation between real exchange rate and output in Egypt.
Because this research aims to assess monetary policy rate endogenous reaction to GDP, inflation and real exchange rate fluctuations; as the consumption, net exports, GDP, inflation and real exchange rate response to monetary policy rate stance, the economy's exogenous shocks must be isolated to distinguish why certain variable shows an specific time path, this means to distinguish if its behavior is caused by endogenous contemporary correlations with other endogenous variables or through a structural shock.
Glushenkova and Zachariadis (2016) support that the adoption of the euro improves goods market integration, which can also be interpreted as increasing real exchange rate adjustments.
Measuring and analyzing the effects of short-term volatility in real exchange rates. The Review of Economics and Statistics, 311-315.
(2015) The impact of the Renminbi real exchange rate on ASEAN disaggregated exports to China.
The real exchange rate, as we noted previously, is one of the variables that can be most affected by booms and busts in oil prices, causing changes in the competitiveness of Colombian industry.
The Central Bank increases policy rate in response to a rise in the foreign interest rate if [delta] > 0 and is assumed to cut down the policy rate in response to an appreciation of real exchange rate according to the Uncovered Interest rate Parity (UIP) condition.
In addition, Charfi (2013) shows that financial liberalization of capital flows in Tunisia leads to real exchange rate appreciation.

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