Effective exchange rate index
The effective exchange rate index describes the strength of a currency relative to a basket of other currencies. Although typically the basket is trade weighted, there are others besides the trade-weighted effective exchange rate index.
Ho (2012) proposed a new approach to compiling effective exchange rate indices. Under this approach, the effective exchange rate can be calculated as a ratio of the normalized exchange value of currency against the
Value of the benchmark currency basket at time t = Σ (GDP weight of currency i(dated 2 years ago from year of time t)* normalized exchange rate of currency i against the US dollar at time t;
Effective exchange rate of currency j = Normalized exchange rate of currency j against the US dollar/Value of the benchmark currency basket against US dollar[1] Archived 2019-02-07 at the Wayback Machine
Ho's procedure allows effective exchange rate indices to be easily compiled for any country.
External links
- Lok Sang Ho, "Globalization Exports,and Effective Exchange Rate Indices," Journal of International Money and Finance, Volume 31, Issue 5, September 2012, Pages 996–1007
- World Currency Unit website, "[2] Archived 2019-01-10 at the Wayback Machine"