Equilibrium real exchange rate in Macedonia

Abstract

This paper provides for an empirical analysis of real exchange rates in Macedonia. The empirical model specifies the equilibrium real exchange rate as a function of the fundamental factors. Then, using the coefficients of the empirical model, the deviation of the actual real exchange rate from its equilibrium values is estimated. Although the estimates differ with the chosen method for approximation of the fundamentals, it seems that the overvaluation of the real exchange rate does not pose serious problems for the policy makers in Macedonia. Finally, the estimation of the short-run empirical model implies slow adjustment of the actual real exchange rate to the long-run equilibrium level.