2009 Estimates of Fundamental Equilibrium Exchange Rates

Cline and Williamson update their estimates of fundamental equilibrium exchange rates (FEERs) for leading advanced and emerging-market economies. This policy brief is a sequel to Policy Brief 08-7, published last July, and is based on the latest developments in the world economy. The authors, refining their methodology from last year, estimate a set of current account targets for 34 countries. On the basis of these estimates, they calculate the bilateral exchange rates against the dollar needed to meet these targets, using Cline's symmetric matrix inversion method (SMIM) first presented in Working Paper 08-6. The authors find significant changes in calculated FEERs from their estimates last year. These changes are due in part to the world financial crisis, which created a significant safe-haven effect for the dollar and led to sharp declines in oil prices. As a result of these developments, the dollar has returned to significant overvaluation of about 17 percent: Every currency examined needs to appreciate against the dollar. While some imbalances with Europe have reemerged since last year, the major imbalance remains vis-à-vis certain Asian currencies, particularly the Chinese renminbi, which needs to rise by about 20 percent on a trade-weighted average basis and by about 40 percent against the dollar. Finally, the authors compare their 2009 FEERs estimates with their estimates from last year in order to assess the accuracy and validity of FEERs estimation.