Observatory on Exchange Rate

Transcription

1 Observatory on Exchange Rate Emerson Fernandes Marçal CEMAP-EESP-FGV

2 Talking points CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real

3 Projects Observatory on Exchange Rate: Foster research on Exchange Rate Equilibrium Models and its relationship with trade issues; Forecast Lab: Joint project with CEQEF; Test and develop forecast techniques to Brazilian Macroeconomic and Financial series; Reconstruction and evaluating compatibility of historical data using Econometric techniques: PNAD reconstruction from 1970 up to now.

4 Projects Observatory on Exchange Rate: Foster research on Exchange Rate Equilibrium Models and its relationship with trade issues; Forecast Lab: Joint project with CEQEF; Test and develop forecast techniques to Brazilian Macroeconomic and Financial series; Reconstruction and evaluating compatibility of historical data using Econometric techniques: PNAD reconstruction from 1970 up to now.

5 Projects Observatory on Exchange Rate: Foster research on Exchange Rate Equilibrium Models and its relationship with trade issues; Forecast Lab: Joint project with CEQEF; Test and develop forecast techniques to Brazilian Macroeconomic and Financial series; Reconstruction and evaluating compatibility of historical data using Econometric techniques: PNAD reconstruction from 1970 up to now.

6 Projects Observatory on Exchange Rate: Foster research on Exchange Rate Equilibrium Models and its relationship with trade issues; Forecast Lab: Joint project with CEQEF; Test and develop forecast techniques to Brazilian Macroeconomic and Financial series; Reconstruction and evaluating compatibility of historical data using Econometric techniques: PNAD reconstruction from 1970 up to now.

7 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

8 Forecast Lab Site - Social Medias; Our Publications: CEMAP Short Notes on economic activity, inflation and exchange rate (link); CEMAP Letters (link); CEMAP Working Papers (link);

9 Forecast Lab Site - Social Medias; Our Publications: CEMAP Short Notes on economic activity, inflation and exchange rate (link); CEMAP Letters (link); CEMAP Working Papers (link);

10 Forecast Lab Site - Social Medias; Our Publications: CEMAP Short Notes on economic activity, inflation and exchange rate (link); CEMAP Letters (link); CEMAP Working Papers (link);

11 Forecast Lab Site - Social Medias; Our Publications: CEMAP Short Notes on economic activity, inflation and exchange rate (link); CEMAP Letters (link); CEMAP Working Papers (link);

12 Forecast Lab Site - Social Medias; Our Publications: CEMAP Short Notes on economic activity, inflation and exchange rate (link); CEMAP Letters (link); CEMAP Working Papers (link);

13 Forecast Lab Many scholar paper published on peer review journals and conferences: Applied Economics; Economic Studies (USP); J. of Forecasting; ESEM, IAAE, Oxmetrics User Conference, BCB; Mini-courses on the subject; Papers on on methodological evaluation of forecast tecniques: inflation, credit volume and default rates, GDP, industrial production; FAPESP, CNPQ grants;

14 Forecast Lab Many scholar paper published on peer review journals and conferences: Applied Economics; Economic Studies (USP); J. of Forecasting; ESEM, IAAE, Oxmetrics User Conference, BCB; Mini-courses on the subject; Papers on on methodological evaluation of forecast tecniques: inflation, credit volume and default rates, GDP, industrial production; FAPESP, CNPQ grants;

15 Forecast Lab Many scholar paper published on peer review journals and conferences: Applied Economics; Economic Studies (USP); J. of Forecasting; ESEM, IAAE, Oxmetrics User Conference, BCB; Mini-courses on the subject; Papers on on methodological evaluation of forecast tecniques: inflation, credit volume and default rates, GDP, industrial production; FAPESP, CNPQ grants;

16 Forecast Lab Many scholar paper published on peer review journals and conferences: Applied Economics; Economic Studies (USP); J. of Forecasting; ESEM, IAAE, Oxmetrics User Conference, BCB; Mini-courses on the subject; Papers on on methodological evaluation of forecast tecniques: inflation, credit volume and default rates, GDP, industrial production; FAPESP, CNPQ grants;

17 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

18 Estimate of Historical Unemployment Rate Unemployment Rate - PNAD

19 Observatory on Exchange Rate: Some Facts First Release of Exchange Rate Estimates were 2010 in CEMAP s Letter number 2; In 2013 Observatory on Exchange Rate was officially created; Two years grant from IPEA ( ); One year grant from BNDES (2014); Three years grant from WTO Chair ( ); Three years from FGV ( );

20 Observatory on Exchange Rate: Some Facts First Release of Exchange Rate Estimates were 2010 in CEMAP s Letter number 2; In 2013 Observatory on Exchange Rate was officially created; Two years grant from IPEA ( ); One year grant from BNDES (2014); Three years grant from WTO Chair ( ); Three years from FGV ( );

21 Observatory on Exchange Rate: Some Facts First Release of Exchange Rate Estimates were 2010 in CEMAP s Letter number 2; In 2013 Observatory on Exchange Rate was officially created; Two years grant from IPEA ( ); One year grant from BNDES (2014); Three years grant from WTO Chair ( ); Three years from FGV ( );

22 Observatory on Exchange Rate: Some Facts First Release of Exchange Rate Estimates were 2010 in CEMAP s Letter number 2; In 2013 Observatory on Exchange Rate was officially created; Two years grant from IPEA ( ); One year grant from BNDES (2014); Three years grant from WTO Chair ( ); Three years from FGV ( );

23 Observatory on Exchange Rate: Some Facts First Release of Exchange Rate Estimates were 2010 in CEMAP s Letter number 2; In 2013 Observatory on Exchange Rate was officially created; Two years grant from IPEA ( ); One year grant from BNDES (2014); Three years grant from WTO Chair ( ); Three years from FGV ( );

24 Observatory on Exchange Rate: Some Facts First Release of Exchange Rate Estimates were 2010 in CEMAP s Letter number 2; In 2013 Observatory on Exchange Rate was officially created; Two years grant from IPEA ( ); One year grant from BNDES (2014); Three years grant from WTO Chair ( ); Three years from FGV ( );

25 Observatory in Action: Releases Estimates of Exchange Rate Misalignment in a Monthly Basis; A Series of Working Papers on the subject; Peer Review Papers Published on Economic Journals; Papers discussed with Staff of Peterson Institute, IMF, World Bank, BCB and private financial institutions; Papers presented and discussed in Conferences such as IAAF, EMG-ECB, LAMES, Oxmetrics Users, Petersen Institute.

26 Observatory in Action: Releases Estimates of Exchange Rate Misalignment in a Monthly Basis; A Series of Working Papers on the subject; Peer Review Papers Published on Economic Journals; Papers discussed with Staff of Peterson Institute, IMF, World Bank, BCB and private financial institutions; Papers presented and discussed in Conferences such as IAAF, EMG-ECB, LAMES, Oxmetrics Users, Petersen Institute.

27 Observatory in Action: Releases Estimates of Exchange Rate Misalignment in a Monthly Basis; A Series of Working Papers on the subject; Peer Review Papers Published on Economic Journals; Papers discussed with Staff of Peterson Institute, IMF, World Bank, BCB and private financial institutions; Papers presented and discussed in Conferences such as IAAF, EMG-ECB, LAMES, Oxmetrics Users, Petersen Institute.

28 Observatory in Action: Releases Estimates of Exchange Rate Misalignment in a Monthly Basis; A Series of Working Papers on the subject; Peer Review Papers Published on Economic Journals; Papers discussed with Staff of Peterson Institute, IMF, World Bank, BCB and private financial institutions; Papers presented and discussed in Conferences such as IAAF, EMG-ECB, LAMES, Oxmetrics Users, Petersen Institute.

29 Observatory in Action: Releases Estimates of Exchange Rate Misalignment in a Monthly Basis; A Series of Working Papers on the subject; Peer Review Papers Published on Economic Journals; Papers discussed with Staff of Peterson Institute, IMF, World Bank, BCB and private financial institutions; Papers presented and discussed in Conferences such as IAAF, EMG-ECB, LAMES, Oxmetrics Users, Petersen Institute.

30 Researchers: Emerson Fernandes Marçal (CEMAP); Vera Thorstensen (CCGI) Beatrice Zimmerman (World Bank); Diogo de Prince (CEMAP - UNIFESP); Giovanni Merlin (PhD candidate, EESP); Rafael Mouallem Rosa (PhD candidate, EESP); Ronan Cunha (PhD candidate, EESP); Oscar Simões (PhD candidate, EAESP).

31 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

32 Brazilian Case: Average Real Effective Exchange Rate Fundamentals Index Year Average Exchange Rate Misalignment

33 Brazilian Case: Preferred Methodology Fundamentals: ToT, NFA, BS and TB. Real Effective Exchange Rate Index Year Exchange Rate Misalignment-RER TB NFA BS TOT

34 Brazilian Case: Preferred Methodology Fundamentals: ToT, NFA, BS and TB. Real Effective Exchange Rate Index Year Exchange Rate Misalignment-RER TB NFA BS TOT

35 Misalignment Decomposition: Fundamentals and Solvency Issues. Index Exchange Rate Misalignment-RER NFA TB-NFA Disequilibrium Contribution Fundamentals Contribution Year

36 Fundamentals: NFA, and TB. North American Case: Real Effective Exchange Rate Fundamentals Index Year Exchange Rate Misalignment

37 Australian Case: Fundamentals: ToT, NFA, BS-PIB and TB. Real Effective Exchange Rate Fundamentals Index Year 20 Exchange Rate Misalignment

38 Summary: Real (R$) compared to its basket has reached its equilibrium; Dolar (US$) compared to its basket is strongly overvalued; Australian Dolar (AUD$) is weakly overvalued.

39 Summary: Real (R$) compared to its basket has reached its equilibrium; Dolar (US$) compared to its basket is strongly overvalued; Australian Dolar (AUD$) is weakly overvalued.

40 Summary: Real (R$) compared to its basket has reached its equilibrium; Dolar (US$) compared to its basket is strongly overvalued; Australian Dolar (AUD$) is weakly overvalued.

41 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

42 Basic Equilibrium Equation for RER. From many intertemporal macroeconomic models it s possible to obtain the following steady state equations RER = φtb + λx (1) equation (1) shows that if a country can run a trade deficit in equilibrium the RER has to appreciate ; The term X accounts for any other factor affecting equilibrium Real Effective Exchange Rate (RER) such as Balassa-Samuelson effect, terms of trade, government consumption, trade and financial openness among others; tb = r NFA (2) equation (2) shows that a country can run a trade deficits if revenues from NFA are large enough;

43 Basic Equilibrium Equation for RER. From many intertemporal macroeconomic models it s possible to obtain the following steady state equations RER = φtb + λx (1) equation (1) shows that if a country can run a trade deficit in equilibrium the RER has to appreciate ; The term X accounts for any other factor affecting equilibrium Real Effective Exchange Rate (RER) such as Balassa-Samuelson effect, terms of trade, government consumption, trade and financial openness among others; tb = r NFA (2) equation (2) shows that a country can run a trade deficits if revenues from NFA are large enough;

44 A brief description of traditional BEER approach Fundamental Real exchange rate is calculated using an econometric model (based on (2)): Applications: Faruquee (1994, IMF), Clark (1999), Ubide (1999) and Kubota (2009) Cointegration techniques based on selected series associated with fundamentals ; Econometric Questions: Detect long run relationship - cointegration analysis; Different set of fundamentals can be tested; Perform permanent and transitory decomposition to better understand the adjustment towards equilibrium; Gonzalo and Granger decomposition is the most common choice;

45 A brief description of traditional BEER approach Fundamental Real exchange rate is calculated using an econometric model (based on (2)): Applications: Faruquee (1994, IMF), Clark (1999), Ubide (1999) and Kubota (2009) Cointegration techniques based on selected series associated with fundamentals ; Econometric Questions: Detect long run relationship - cointegration analysis; Different set of fundamentals can be tested; Perform permanent and transitory decomposition to better understand the adjustment towards equilibrium; Gonzalo and Granger decomposition is the most common choice;

46 A brief description of traditional BEER approach Fundamental Real exchange rate is calculated using an econometric model (based on (2)): Applications: Faruquee (1994, IMF), Clark (1999), Ubide (1999) and Kubota (2009) Cointegration techniques based on selected series associated with fundamentals ; Econometric Questions: Detect long run relationship - cointegration analysis; Different set of fundamentals can be tested; Perform permanent and transitory decomposition to better understand the adjustment towards equilibrium; Gonzalo and Granger decomposition is the most common choice;

47 A brief description of traditional BEER approach Fundamental Real exchange rate is calculated using an econometric model (based on (2)): Applications: Faruquee (1994, IMF), Clark (1999), Ubide (1999) and Kubota (2009) Cointegration techniques based on selected series associated with fundamentals ; Econometric Questions: Detect long run relationship - cointegration analysis; Different set of fundamentals can be tested; Perform permanent and transitory decomposition to better understand the adjustment towards equilibrium; Gonzalo and Granger decomposition is the most common choice;

48 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

49 Our starting point We assume for simplicity that DGP for the variables trade balance, real effective exchange rate and net foreign asset position and fundamentals is given by the following vector autoregressive model: Y t = Γ 1 Y t Γ k 1 Y t k+1 + αβ Y t 1 + µ + ε t (3) Instead of arbitrarily ignoring trade balance information and estimate (2), we jointly estimate (2) and (1). We use long run restrictions suggested by the theory to validate the exchange rate misalignment estimate;

50 Our starting point We assume for simplicity that DGP for the variables trade balance, real effective exchange rate and net foreign asset position and fundamentals is given by the following vector autoregressive model: Y t = Γ 1 Y t Γ k 1 Y t k+1 + αβ Y t 1 + µ + ε t (3) Instead of arbitrarily ignoring trade balance information and estimate (2), we jointly estimate (2) and (1). We use long run restrictions suggested by the theory to validate the exchange rate misalignment estimate;

51 Our starting point We assume for simplicity that DGP for the variables trade balance, real effective exchange rate and net foreign asset position and fundamentals is given by the following vector autoregressive model: Y t = Γ 1 Y t Γ k 1 Y t k+1 + αβ Y t 1 + µ + ε t (3) Instead of arbitrarily ignoring trade balance information and estimate (2), we jointly estimate (2) and (1). We use long run restrictions suggested by the theory to validate the exchange rate misalignment estimate;

52 Transitory and Permanent components Using the parameters from (3), it is possible to calculate the transitory (T it ) and permanent (P it ) components from the following equations: P t = β (α β ) 1 α Y t (4) T t = α(β α) 1 β Y t (5) Assuming that the real exchange rate is in the first position of the vector, and using the value of the error correction mechanism centered on their own means, we can calculate the misalignment using the following equation, then: mis t F 1 (β 1Y t E([β 1Y t ]) + F 2 (β 2Y t E([β 2Y t ]) (6) where [ V 1 V 2 ] = (β α) 1 and V i has dimension 2x1 F [F 1 F 2 ] = [ [ ][ α 1 α 2 ]V 1 [ ][ α 1 α 2 ]V 2 ].

53 Transitory and Permanent components Using the parameters from (3), it is possible to calculate the transitory (T it ) and permanent (P it ) components from the following equations: P t = β (α β ) 1 α Y t (4) T t = α(β α) 1 β Y t (5) Assuming that the real exchange rate is in the first position of the vector, and using the value of the error correction mechanism centered on their own means, we can calculate the misalignment using the following equation, then: mis t F 1 (β 1Y t E([β 1Y t ]) + F 2 (β 2Y t E([β 2Y t ]) (6) where [ V 1 V 2 ] = (β α) 1 and V i has dimension 2x1 F [F 1 F 2 ] = [ [ ][ α 1 α 2 ]V 1 [ ][ α 1 α 2 ]V 2 ].

54 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

55 Adapting Blinder-Oaxaca decomposition: Blinder-Oaxaca decomposition. misi,t JMA mis BEER i,t = ( hjma 1 h1 BEER 1)(h BEER 1 f BEER 1,t ) } {{ } Less weight on what we knew 1 (f1,t JMA f1,t BEER ) + h JMA +h JMA + 2 f2,t JMA } {{ } What we learn from new model (7)

56 Adapting Blinder-Oaxaca decomposition: If cointegrated relationships are properly identified: f1,t JMA f1,t BEER p 0 (8) Both models are nested and it is interesting to investigate whether hjma 1 h BEER 1 = 1 h JMA 2 = 0.

57 Conditions to guarantee h JMA 2 = 0 Weight of GG decomposition are given by: [ ]( [ h JMA 1 h2 JMA ] = α(β α) 1 α11 α = 21 β 1 α 1 β 1 α ) 1 2 α 12 α 22 β 2 α 1 β 2 α (9) 2 If β 1 α 2 = 0 and α 21 = 0 then h JMA 2 = 0. Note that α 21 = 0 is not sufficient to guarantee h JMA 2 = 0.

58 Example when h JMA 2 = 0 Assume that: [ ] α α11 ab = 32 a α 41 α 51 0 α 21 α 31 α 41 α 51 (10). β = [ 1 0 b31 b 41 ] b b (11) Then β 1 α 2 = 0 and α 21 = 0 and so h JMA 2 = 0.

59 Example when ( hjma 1 1) = 0 and h JMA h1 BEER 2 = 0 Assume that: [ ] α α = 0 0 α 31 α 41 α 51 (12). β = [ 1 0 b31 b 41 ] b b (13) Then ( hjma 1 1) = 0 and h JMA h1 BEER 2 = 0. Note also that h1 JMA = h1 BEER = 1

60 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

61 Database description Variable Source Definition Real Effective IMF and Weighted Average of Real exchange rate Exchange Rate BIS based on Consumer price index (RER i,t ).

62 Database description Variable Source Definition Real Effective Exchange Rate IMF and BIS Weighted Average of Real exchange rate based on Consumer price index (RER i,t ). Trade balance as Share of GDP IMF and WB Ratio of trade balance and GDP (TB i,t )

63 Database description Variable Source Definition Real Effective Exchange Rate Trade balance as Share of GDP Relative per capita income IMF and BIS IMF and WB Weighted Average of Real exchange rate based on Consumer price index (RER i,t ). Ratio of trade balance and GDP (TB i,t ) WB BSPIB i,t = Percapita Indexi i,t N i=1 w i Percapita Index j,t

64 Database description Variable Source Definition Real Effective Exchange Rate Trade balance as Share of GDP Relative per capita income Relative terms of trade IMF and BIS IMF and WB Weighted Average of Real exchange rate based on Consumer price index (RER i,t ). Ratio of trade balance and GDP (TB i,t ) WB BSPIB i,t = Percapita Indexi i,t N i=1 w i Percapita Index j,t IMF Tot i,t = ToT i,t N i=1 w i ToT j,t

65 Database description Variable Source Definition Real Effective Exchange Rate Trade balance as Share of GDP Relative per capita income Relative terms of trade Net Foreign Asset Position IMF and BIS IMF and WB Weighted Average of Real exchange rate based on Consumer price index (RER i,t ). Ratio of trade balance and GDP (TB i,t ) WB BSPIB i,t = Percapita Indexi i,t N i=1 w i Percapita Index j,t IMF Tot i,t = Milesi e Ferreti and IMF ToT i,t N i=1 w i ToT j,t Ratio of Net Foreign Asset Position and GDP (NFA i,t )

66 Database description Variable Source Definition Real Effective Exchange Rate Trade balance as Share of GDP Relative per capita income Relative terms of trade Net Foreign Asset Position IMF and BIS IMF and WB Weighted Average of Real exchange rate based on Consumer price index (RER i,t ). Ratio of trade balance and GDP (TB i,t ) WB BSPIB i,t = Percapita Indexi i,t N i=1 w i Percapita Index j,t IMF Tot i,t = Milesi e Ferreti and IMF ToT i,t N i=1 w i ToT j,t Ratio of Net Foreign Asset Position and GDP (NFA i,t ) Relative price ratio IMF BS i,t = WSP i,t IPCi,t N i=1 w WSP i,t i CPI i,t

67 Are TB and NFA cointegrated? Countries Rank Eigenvalues Trace p-value Australia r= % *** r= % Austria r= % r= % Brazil r= % ** r= % China r= % r= % Colombia r= % r= %

68 Are TB and NFA cointegrated? Countries Rank Eigenvalues Trace p-value Denmark r= % * r= % Finland r= % *** r= % Germany r= % r= % Greece r= % r= % Ireland r= % r= %

69 Are TB and NFA cointegrated? Countries Rank Eigenvalues Trace p-value Italy r= % * r= % Japan r= % *** r= % * Korea r= % *** r= % Mexico r= % r= % Netherland r= % r= %

70 Are TB and NFA cointegrated? Countries Rank Eigenvalues Trace p-value New Zeland r= % * r= % Norway r= % ** r= % Portugal r= % r= % Singapore r= % ** r= % Spain r= % *** r= %

71 Are TB and NFA cointegrated? Countries Rank Eigenvalues Trace p-value Sweden r= % ** r= % Switzerland r= % r= % Turkey r= % * r= % United Kingdom r= % * r= % United States r= % r= % *

72 Summary of evidence for TB and NFA: Evidence of cointegration between TB and NFA for good number of variables. The number of rejection taking into account the size of the sample is quite good;

73 Summary of evidence for TB and NFA: Evidence of cointegration between TB and NFA for good number of variables. The number of rejection taking into account the size of the sample is quite good;

74 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

75 What we have learned from the model with TB:

76 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

77 What we have learned from the model with TB:

78 CEMAP: Forecast Lab: Time Series Reconstruction: Observatory on Exchange Rate: Recent Releases: Misalignment Assessment Why do we have a preferred methodology? Traditional Behavioral Exchange Rate Approach Addressing Important Econometric Issues Our approach: Joint Modeling (JMA) Why exchange misalignment can differ. Empirical Illustration Database Description Brazilian Case: Australian Case: Future Challenges Mapping Real Effective Exchange rate into bilateral real exchange rate

79 From REER to bilateral real exchange rate: After some algebra it is possible to convert RER misalignment estimates into bilateral estimates;

80 Bilateral estimates: 50 AU IT SW 40 AS JP SZ BE KR UK BR ME US CA NE CN NZ DE NO FI PO FR SG GE SP

81 But nominal variable may matter: After some algebra it is possible to convert REER misalignment estimates into bilateral real estimates; Under certain statistical conditions it may be possible to model nominal variables as marginal models; It would be possible to address how nominal shocks in interest rate and-or inflation affect real exchange rate and misalignment; No preliminary results to show but probably next seminar!

82 But nominal variable may matter: After some algebra it is possible to convert REER misalignment estimates into bilateral real estimates; Under certain statistical conditions it may be possible to model nominal variables as marginal models; It would be possible to address how nominal shocks in interest rate and-or inflation affect real exchange rate and misalignment; No preliminary results to show but probably next seminar!

83 But nominal variable may matter: After some algebra it is possible to convert REER misalignment estimates into bilateral real estimates; Under certain statistical conditions it may be possible to model nominal variables as marginal models; It would be possible to address how nominal shocks in interest rate and-or inflation affect real exchange rate and misalignment; No preliminary results to show but probably next seminar!

84 But nominal variable may matter: After some algebra it is possible to convert REER misalignment estimates into bilateral real estimates; Under certain statistical conditions it may be possible to model nominal variables as marginal models; It would be possible to address how nominal shocks in interest rate and-or inflation affect real exchange rate and misalignment; No preliminary results to show but probably next seminar!

85 Dealing with mixed frequency: Variables are available in different frequency (daily, monthly, quarterly, etc); How to adapt the methodology to deal with fact in an efficient way; No preliminary results to show but probably next seminar!

86 Dealing with mixed frequency: Variables are available in different frequency (daily, monthly, quarterly, etc); How to adapt the methodology to deal with fact in an efficient way; No preliminary results to show but probably next seminar!

87 Dealing with mixed frequency: Variables are available in different frequency (daily, monthly, quarterly, etc); How to adapt the methodology to deal with fact in an efficient way; No preliminary results to show but probably next seminar!

88 That s all.