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 ?
Since Engel-type real exchange rate variance decomposition exercises may underestimate the importance of the relative price of non-traded goods, in this paper I use a different approach.
The purpose of this article is, therefore, to determine the effect of the real exchange rate on Colombia's total industrial employment and on 59 of the country's industrial sectors for the period 2000-2010.
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.
Before examining the linkage between real exchange rate, portfolio flow and industrial production, it is first necessary to distinguish between short-term and long-term uncertainty using the local level model.
Inflation, growth, and the real exchange rate under inflation targeting
The real exchange rate trend has been computed using bilateral real exchange rate with US dollar.
The Balassa-Samuelson model has been widely used in analyzing real exchange rate determination.
For more on the macroeconomic implications of the volatility and cyclicality of the terms of trade and real exchange rate see Grimes (2006) and Chetwin, Ng, and Steenkamp (2013), respectively.
Nonetheless, by the end of April the real exchange rate index reached 108 due to two evolutions.
Thus, monetary policy cannot be used to initiate changes in the real exchange rate designed to achieve some domestic goal if this involves changing the nominal exchange rate.
In line with the theoretical models involving transaction costs, one can characterize real exchange rate movements based on a Band-Threshold Autoregressive (Band-TAR) and exponential smooth-transition autoregressive (ESTAR) models.
The authors also find that the rate of international reserve accumulation tends to reduce the appreciation of the real exchange rate in episodes of commodity price booms and busts.

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