The equilibrium exchange rate: An application to developing countries

The Exchange rate which is one of the significant macroeconomic parameters, is the indicator of competitiveness for countries. Developing countries have continuously faced with problem of Exchange rate fluctuations and current account deficit with the effect of globalization in recent years. In most developing countries such as Turkey which experienced increase real effective Exchange rate especially in 2000s, the increase in the current account deficit has beeen seen along with an increase in the value of their currency. Therefore, determination of equilibrium real effective Exchange rate has been in the most important place in debate discuss recently. In Turkey, after the crisis in 2001, it is considered that real effective exchange rate tends to be more high level, so national currency appreciation contributes to current account deficit. For this purpose, in this academic stıdy, equilibrium exchange rate is estimated with use of panel data techniques for 15 developing countries having problem of current account deficit such as Turkey in the period of 1995-2012. Accordingly, misalignments from equilibrium exchange rate are specified and the value of the currency in real terms have been identified in the countries examined, in particular for Turkey. In this context, equilibrium exchange rate is estimated by means of the Behavioral Equilibrium Exchange Rate Approach (BEER) explaining the cyclical movements in exchange rate and the Fundamental Equilibrium Exchange Rate Approach (FEER) providing the level of the real exchange rate obtained which is compatible with internal and external equilibrium in economy. Equilibrium exchange rate and level of misalignment obtained is evaluated in terms of economic equilibrium by comparing two approaches. It was found that real effective exchange rate is close to equilibrium level in most countries examined, based on results of analysis with FEER approach, as real effective exchange rate diverges from the equilibrium level considerably in accordance with the result of this analysis with BEER approach. Accordingly, the exchange rate misalignments obtained by BEER approach was found to be very high compared to FEER approach. As a result, it was found that in spite of fact that it is lower than equilibrium level in some countries, real effective exchange rate is very high than equilibrium level in some countries as in Turkey. The problem of current account deficit in countries having lower real effective exchange rate than equilibrium level shows that their production structure and their exports is dependent on imports. Likewise, it was found that there is a structure that export is dependent on import in countries such as Turkey which has higher real effective exchange rate than equilibrium level. Accordingly, it was identified that higher real effective exchange rate than equilibrium level and dependency of export structure to import are two factors that increase level of current account deficit in Turkey.