Newshound Guru P…. This is [from] the World Bank data bank – Real Effective Exchange Rate is the nominal effective exchange rate in measure of the value of a currency against a weighted average of several foreign currencies divided by a price denominator or index of costs… Iraq already reports a real effective exchange rate.
Well the good news is this guy finally used a source other than Wikipedia. As usual though, he doesn’t have it quite correct. Per the IMF, The REER is an average of the bilateral RERs between the country and each of its trading partners, weighted by the respective trade shares of each partner. So, with that said, Iraq would need to be in a basket of other oil producing countries or, at least regional currencies that could help establish a value of the actual currency. Are there any other of the oil producing countries at a rate similar to Iraq? Not even close. Therefore we can conclude that Iraq is not valued are a RER with any countries with similar weighted values. I wish someone would take away Pimple’s crayon, he creates such a controversy under the guise of “helping people stay grounded”. So here we are, on the threshold of April. As I actually reported way back in 2009, the months Iraq has most likely changed the value of the dinar, are April and September. Does that mean it can’t happen in another month? Absolutely not! But I am of the opinion that if it doesn’t happen by the end of April, due to the timing of events, I don’t expect anything to happen until at least September or the last quarter of the year.
Once more to give the final questions about what the REER and the NEER (oh no, not another term!) really are.
How to calculate REER?
- A country’s REER can be derived by taking the average of the bilateral exchange rates between itself and its trading partners and then weighing it using the trade allocation of each partner.
- The average of the exchange rates is calculated after assigning the weightings for each rate. For example, if a currency had a 60% weighting, the exchange rate would be raised to the power by 0.60 and do the same for each exchange rate and its respective weighting.
- Multiply each exchange rate in step 2 by each other and multiply the final result by 100 to create the scale or index.
- Some calculations use bilateral exchange rates while other models use real exchange rates, which adjusts the exchange rate for inflation. Regardless of the way in which REER is calculated, it is an average and considered in equilibrium when it is overvalued in relation to one trading partner and undervalued in relation to a second partner.
NEER is a trade-weighted currency index which is calculated keeping in mind the bilateral nominal exchange rates of the home currency in terms of foreign currencies.
NEER is a trade-weighted currency index which is calculated keeping in mind the bilateral nominal exchange rates of the home currency in terms of foreign currencies.
Looking at those definitions and calculations, you can easily see that Iraq does not have the equated values of trading partners in the region or worldwide.
Don’t let the wikipedia readers get the best of you.
BWM