Estimation of the Equilibrium Real Exchange Rate for Malawi

This paper computes Malawi''s equilibrium real exchange rate as a function of its fundamentals as derived from economic theory. It finds evidence in favor of the equilibrium approach to exchange rate determination, with several variables (particularly government consumption and real per capita growth) found to drive movements in the time-varying equilibrium real exchange rate. The results also indicate that following a shock there is a rapid reversion of the real exchange rate to its time-varying equilibrium, with a half-life of reversion of about 11 months.Real effective exchange rates;Economic models;exchange rate, real exchange rate, statistics, standard error, cointegration, equation, equations, nominal exchange rate, exchange rates, real effective exchange rate, effective exchange rate, equilibrium exchange rate, empirical model, real exchange rates, statistic, exchange rate regimes, fixed exchange rate, fixed exchange rate regimes, financial statistics, foreign exchange, general equilibrium model, statistical method, logarithms, significance level, nominal exchange rate depreciation, flexible exchange rate, real variables, exchange rate policy, foreign exchange market, survey, estimation procedure, exchange rate determination, exchange rate reform, fixed nominal exchange rate, flexible exchange rate regimes, stationary process, statistical analysis, logarithm, exchange rate depreciation