Given these conceptual building blocks of an equilibrium exchange rate, the IMF’s Consultative Group on Exchange Rates (CGER) uses three alternative methodologies to estimate fair values of exchange rates: (i) the Macroeconomic Balance (MB) approach, (ii) the Equilibrium Real Exchange Rate (ERER) approach, and (iii) the External Sustainability (ES) approach. 38.
In addition, central bankers should have a thorough and practical, rather than a purely academic, understanding of the economy and, given the Federal Reserve’s objective to preserve financial stability, of financial markets and institutions. The committee’s institutional memory may also matter in this context.