What is real effective exchange rate (REER)? – IMF DATA Help (2024)

FAQs

What is real effective exchange rate (REER)? – IMF DATA Help? ›

REER is the real effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs.

The real effective exchange rate (REER) is the weighted average of a country's currency in relation to an index or basket of other major currencies. The weights are determined by comparing the relative trade balance of a country's currency against that of each country in the index.

Specifically, changes in the REER take into account both nominal exchange rate developments and the inflation differential against a basket of trading partners. An increase in NEER indicates an appreciation in nominal terms, whereas an increase in REER corresponds to an appreciation in real terms.

The real rate tells us how many times more or less goods and services can be purchased abroad (after conversion into a foreign currency) than in the domestic market for a given amount. In practice, changes of the real exchange rate rather than its absolute level are important.

I. Definition and content

In this respect, REER values above 100 signify a downward trend in the country's competitiveness relative to the base period, whereas an REER below 100 means rising competitiveness of the country relative to the base period.

An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness.

REER may be used to compare the worth of one nation's currency to the currencies of other nations. A REER value greater than 100 for a particular year implies that the currency has been overrated. On the other hand, if the REER value is within 100 in a given year, that currency is currently undervalued.

An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness.

If there was PPP, then the real exchange rate would be equal to 1. If it is greater than 1, then the foreign currency is overvalued relative to the domestic currency (and, of course, the domestic currency is undervalued.) If it is less than 1, the foreign currency is undervalued relative to the domestic currency.

If the change in the REER is negative, then the economy is gaining competitiveness compared to its trading partners, and vice versa.

What is real exchange rate for dummies? ›

What is real exchange rate? The real exchange rate is the exchange rate between countries that takes into account the price level difference between these countries.

For consumers, a lower currency value means imported goods get pricier. A higher currency value means imported goods are more affordable. That's highly relevant in most countries, where products like electronics and cars are mostly imported.

An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.

Generally speaking, you should aim to contribute at least 10% of your gross income each year to your retirement savings. Start contributing in your early 20s, and that 10% per year could add up to a sizeable savings and a comfortable retirement. Start later in life—say, your late 30s—and 10% a year may not cut it.

To determine what's “good,” you must understand what's normal by checking the mid-market rate. This term refers to the midpoint between the buy and sell prices of any two currencies across different vendors and banks. Anything that hits that range or above is considered a good rate.

If the PPP exchange rate of a currency implied by the local price of a given good or basket of goods is lower than the currency market exchange rate, then the exchange rate is overvaluing the local currency relative to its real purchasing power, and if the rate implied by the local price is higher than the market ...

movements in the real exchange rate represent deviations from PPP. Hence, a discussion of the real exchange rate is tantamount to a discussion of PPP. Although the term “purchasing power parity” was coined as recently as 80 years ago (Cassel, 1918), it has a much longer history in economics.

REER is higher than NEER because the increase or development of REER may imply that imports become cheaper and the exports become more exclusive and expensive than imports. Hence, it can be stated that an increase can indicate a loss which is related to trade competitiveness.

Bilateral exchange rate involves a currency pair, while an effective exchange rate is a weighted average of a basket of foreign currencies, and it can be viewed as an overall measure of the country's external competitiveness.

The effective exchange rate index describes the strength of a currency relative to a basket of other currencies. Although typically the basket is trade weighted, there are others besides the trade-weighted effective exchange rate index. Ho (2012) proposed a new approach to compiling effective exchange rate indices.