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Economics - Currency Exchange Rates (Part 3)

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3 IMF Approaches on Exchange Rate Issues

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Terms in this set (39)

3 IMF Approaches on Exchange Rate Issues

macroeconomic balance approach, external sustainability approach, reduced form economic model

Macroeconomic Balance Approach

estimates how much current exchange rates must adjust to equalize a country's expected medium-term current account imbalance and the country's sustainable current account imbalance

External Sustainability Approach

estimates how much current exchange rates must adjust to force a country's net foreign asset to GDP or net foreign liability to GDP ratios towards sustainable benchmark levels

Key Difference - Macroeconomic Balance vs. External Sustainability Approaches

macroeconomic balance approach focuses on real flows (imports/exports, goods/services) to explain long-run fair value in exchange rates, whereas external sustainability approach focuses on financial flows to explain long-run fair value in exchange rate

Reduced Form Econometric Model

seeks to estimate the equilibrium path that a currency should take on the basis of the trends in several key macroeconomic variables, essentially combining the macroeconomic balance and external sustainability approaches