Working paper

Timely measurement of real effective exchange rates

This paper contributes to the measurement of monthly consumer price index-based real effective exchange rates with two main novelties.

Publishing date
23 December 2021
Zsolt Darvas

This working paper updates the earlier methodological description of the dataset published as Darvas, Z. (2012) 'Real effective exchange rates for 178 countries: A new database', Working Paper 2012/06, Bruegel

Click here for the most recently updated database

We demonstrate that short-run real exchange effective rate changes are dominated by nominal effective exchange rate changes, while inflation rates are sticky and contribute little to short-run real exchange rate changes. These observations allow a rather accurate real-time approximation of the real effective exchange rate using actual nominal exchange rate data and forecast inflation data. We measure the approximation error and find it is minor for most countries and sizeable only for a few countries experiencing high and volatile inflation. For a set of countries, the revision in our estimates using real-time data is slightly lower than the revision in World Bank estimates and much lower than International Monetary Fund estimates. By considering two widely studied economic issues, unit root testing in real exchange rates and nominal exchange rate forecasting with the real exchange rate, we find that using a version of real exchange rates based on approximated monthly price level data instead of actual price level data hardly changes the conclusions on unit roots and forecasting. By combining alternative data sources for exchange rates and consumer prices, we calculate up-to-date monthly real effective exchange rates for 177 countries and the euro area. Our dataset, which is frequently updated, includes more than twice as many observations as the second most comprehensive dataset.

Online annex

Recommended citation:
Darvas, Z. (2021) ‘Timely measurement of real effective exchange rates', Working Paper 15/2021, Bruegel

About the authors

  • Zsolt Darvas

    Zsolt Darvas, a Hungarian citizen, joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009, before being appointed Senior Fellow from September 2013. He is also a Senior Research Fellow at the Corvinus University of Budapest.

    From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

    Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

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