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Measuring meaningfully the real exchange rate and the fundamental equilibriumexchangerate is always a difficult task.
Note that this economy is also characterized by the indeterminacy of the equilibriumexchangerate.
By including the macro-hysteretic relationship into a macroeconomic overshooting model, the effect of temporary fluctuations on the long-run equilibriumexchangerate can be derived.
The demands of the fundamentalist and chartist agents in the two countries determine the temporary equilibriumexchangerate at each point in time.
Using this method, one finds the equilibriumexchangerate as the ratio of price levels in the two countries, multiplied by some predetermined factor.
The model produces realistic features of the equilibriumexchangerate series.
The expected rate of exchange rate depre ciation ee is assumed to be proportional to the discrepancy between the actual rate and the long-run equilibriumexchangerate.
By the fourth quarter of this year the average equilibriumexchangerate should be $1·45.
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