What is the real effective exchange rate?
A real effective exchange rate (REER) measures a currency against a trade-weighted basket, adjusting for relative prices.
Construction
1. Nominal basket Partner currencies are combined with trade weights that may be revised. 2. Price adjustment Domestic versus foreign prices or costs adjust the nominal measure; CPI and other indices can give different results. 3. Index base A value above 100 reflects a chosen base period, not automatically overvaluation. 4. Direction A rise usually denotes real appreciation, but always check the publisher’s convention.
Limits of interpretation
5. Competitiveness Price competitiveness is one influence; quality, productivity and input costs also shape trade. 6. Not a spot quote A daily bilateral currency move is not the same as a price-adjusted trade-weighted index. 7. Illustration A weaker bilateral rate can be offset by faster domestic inflation in a real trade-weighted measure. Export volumes depend on more factors.