Chapter 3 – Real equilibrium exchange rates

Real exchange rates often appreciate or depreciate over longer periods of time. Such behaviour may be caused by changes in their equilibrium values. This paper presents some of the popular explanations for changes in equilibrium real exchange rates and methods for calculating them. It focuses on three common approaches: the theory of purchasing power parity, the behavioural equilibrium exchange rate and the fundamental equilibrium exchange rate approaches. The paper also reviews briefly some of the recent empirical studies based on these approaches. 1