Temporal Dimension and Equilibrium Exchange Rate: a FEER / BEER Comparison

We analyze, in a unified theoretical framework, the two main models for equilibrium exchange rate, namely, the BEER and the FEER approaches. In order to understand the interactions between them, we study in detail the temporal links between these two measures. Our results show that, in average, the BEER and the FEER are closely related. Yet, important differences can be observed for some countries and/or some periods of time. Therefore, we analyze some of the factors that may explain this disconnection, identifying several aspects which are able to alter the relation between the current account and the real effective exchange rate, and so, between the FEER and the BEER. Our analysis puts forward the structural changes in matter of competitiveness, the dynamics of foreign asset positions and valuation effects as explanations for the divergence.