INDICES OF EFFECTIVE EXCHANGE RATES: A COMPARATIVE STUDY OF ETHIOPIA, KENYA AND THE SUDAN
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Date
1994-11
Authors
KIDANE, ASMEROM
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
The paper considers the various indices of effective exchange rate that are applied
in many countries to measure the overvaluation or undervaluation of a particular
currency compared to the currency of major trading countries. First the
conceptual issues of the nominal effective exchange rate (NEER) is considered.
In general there are three types of nominal effective exchange rates namely the
export weighted, import weighted and trade weighted rates. Other indices may
also be developed on the basis of the three indices. The major drawback with
these rates is that they do not isolate the effect of overvaluation from possible
inflationary differentials between reporting countries and major trading partners.
In order to isolate the pure exchange rate effect, the nominal effective exchange
rate should be deflated by the ratio of the inflation rate of a reporting country to
that of a partner country. This would in turn give us the Real Effective Exchange
Rate (REER). There are two problems associated with the conversion of NEER
to REER. First, there is an issue of what type of price index to use. There are
several indices including the Consumer Price Index (CPI), the wholesale price
index (WPI), as well as other related indices. Second, even if a particular index
is chosen, that index may not be measured in a similar manner between the two
countries. If the Real Effective Exchange Rate (REER) is measured with minimal
error then such an index may be a measure of changes in the price of tradables
compared to non-tradables. In other words, the REER is akin to the Real
Exchange Rate (RER).
Description
HG 3982.9 .A85 1994
Keywords
Foreign Exchange rates - Africa , Eastern , Foreign exchange rates , Africa, Eastern