Equilibrium Exchange Rates: a Guidebook for the Euro-Dollar rate

Abstract

Assessing the level of exchange rates encounters a number of diculties. The most immediate one is to define what is meant by exchange rates. There are two polar views on this issue. The first one considers that, to the extent that they are determined by market forces, observed exchange rates are always at a market equilibrium. This short-term, market equilibrium relies on fundamentals and on expectations about fundamentals. Why then worry about this short-run equilibrium? The reason is that this market-equilibrium exchange rate can be submitted to noise and speculative bubbles, hence it can largely dier from its fundamental value.

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