I have become very confused about how I can generate the time series REER [Real Effective Exchange Rate ] data from NER. I am conducting research on,
"How Does The Exchange Rate Affect on The Trade Balance of Bangladesh: An Empirical Analysis"
I have taken the data of Nominal exchange rate of 1999-2018 period. Now I need to convert that into REER to run some analysis, Such as regression analysis following the model of Singh (2002) and Rose (1991).
InBoT = β + β InREER + β InY + β InY * +ε
Then I have a plan to check the co-integration between REER and Balance of Trade in the case of Bangladesh.
But, I got stuck in the first phase. Someone help me, I am not getting the time series REER data anywhere, Not even getting a proper way how I can generate it for myself.
I would assume that the Nominal Exchange Rate (NER) you have it is actually the Effective Exchange Rate (EER).
EER is the weighted average of the bilateral exchange rates of the currency of your country to the currencies of its trading partners.
However, you need this index in Real terms. There are two ways I can think of calculating it.
A Method:
You use (a) the General Price Index of your country - P0 - and (b) a Price Index that represents the price levels of the other countries - P1.
Then: REER = EER * P0 / P1
B Method:
You use the bilateral exchange rates of the domestic currencies to the currencies of the trading partners. You can convert those to real bilateral exchange rates (using the formula above). Then you can manually calculate REER as the weighted average of those bilateral real exchange rates, using the trade with each country as the corresponding weights.
To be honest, given that both methods are not so easy to apply, I would chose to use only one exchange rate, e.g. the exchange rate of the domestic currency with the currency of the country with the biggest amount of trade. One nominal exchange is easy to be converted to real terms (the formula is the one given above) using the domestic and the foreign CPI,. Then you use that one in your estimations. You can ask your lecturer if that is possible.
Good Luck with your research.
I presume that REER is the real effective exchange rate. There are many ways to estimate your real effective exchange rate. Basically you get a time series of nominal exchange rates with various countries and calculate a weighted arithmetic or geometric average of these exchange rates. The type of weights used depends on the purpose of the index but they are generally some form of export, or import, or trade weights. On then gets a series of relative price indices and calculates a weighted index of relative prices. The ratio of these two indices is then the REER. Alternatively one could convert the individual exchange rate index series to real and then calculate a weighted average of the real exchange rates.
On second thoughts, why not look at the reports of your Central Bank, or the IFS database of the International Monetary Fund or google "Bangladesh Real Effective Exchange Rate" and you will find all these calculations done for you. Unless you are calculating the REER between two individual countries you do not want to get into the burden of collecting and calculating the REER. Even if you are just working with two countries IFS would be very useful and it is free.
This is a huge project in reference to collection of data, this is the reason large international organizations such as IMF and large central banks like the ECB undertake such projects.You can make a theoretical contribution or you can work with others in a large international institution such as central bank.
best of luck George K Zestos
you can found the statistics of REER in IFS ( imf.org) International Financial Statistics or you could calculate the REER through NEER by using the equation REER=NEER* P*/p which p* is the index of consumption price of trading partners and P is the index ofconsumption price of your country, by using Geometric mean. Good luck.
You need take the weighted average REER. The weights should be the share of the countries - main trade partners in the domestic country's trade.