The Evaluation of the Equilibrum Exchange Rate based on the Purchase Power, for Romania’s Case

Abstract

The current paper aims to analyse one of the many models of evaluation for the equilibrum rate in an economy. It also briefly presents the main models and methods used in the specialized literature for the evaluation of the equilibrum exchange rate. The utilization of as many methods allows the deciders of monetary and economic policy to accurately ground the moment of one country adhesion to the euro zone. Also, an analysis can be made, whether the respective countru is ready and how fast the process of convergence to the Euro zone can evolve. In general, it is recommendable a country not to force de adhesion to the euro zone because the negative effects may occur for a long period of time, leading to a development for the respective economy under its potential. The estimated model in Romania based on data will be afterwards used for estimating the equilibrum rate and for issuing scenarios concerning its future evolution. Usually, the parity at which the national currency should be converted for an unlimited period of time, will also be around the level of the equilibrum rate. From that moment on, after attending the Exchange Rate Mechanism II (ERM II), the respective country’s economy loses an equilibrum buffer – the exchange rate. Starting from that moment, the country’s economy is supposed to be so performant that it absorbs the internal and external negative shocks, only relaying on the fiscal and budget policies. Hence, the particular importance of a correct evaluation for the equilibrum rate by using several models and methods, so that to be as close as possible to the equilibrum level on mid term.

Keywords

• equilibrium exchange rate
• Purchasing Power Parity
• Desirable Equilibrium Exchange Rate
• Natural Equilibrium Exchange Rate