Chapter 4 – Real equilibrium exchange rates for

This article presents and employs the theories of purchasing power parity (PPP), behaviour equilibrium real exchange rate (BEER) and the fundamental equilibrium real exchange rate (FEER) to estimate the equilibrium real exchange rate for Norway. It also discusses whether the real exchange rate was overvalued in 2002 relative to the implied estimates of the equilibrium real exchange rate and whether Norway’s substantial petroleum wealth imply a permanently strong equilibrium real exchange rate. It appears that both the PPP and the BEER approaches imply a constant equilibrium exchange rate for Norway. Estimates of the equilibrium real exch-ange rate imply that the real exchange rate was overvalued in 2002. On the other hand, the FEER approach implies an estimate of the equilibrium real exchange rate on a par with the actual exchange rate in this period. However, the equilibrium exchange rate can not remain at a strengthened rate. Calculations of FEER suggest that it weakens over time and converge towards the rate that balances foreign trade with traditional goods and services. This is because the share of import that can be financed by petroleum revenues becomes insignificant in the long run as import of goods and services is assumed to grow with growth in income. 1