Updated Estimates of Fundamental Equilibrium Exchange Rates

In this semiannual update of their estimates of fundamental equilibrium exchange rates (FEERs), William R. Cline and John Williamson again find that the overvaluation of the dollar and undervaluation of the Chinese renminbi have become much more modest than in previous years, as their current account imbalances have narrowed. Seriously undervalued currencies now include those of Singapore, Taiwan, Hong Kong, and Malaysia, as well as the Swiss franc and Swedish krona. Serious overvaluation persists for Turkey, New Zealand, Australia, and (though less so than before) South Africa. The authors welcome the new External Sector Report of the International Monetary Fund, which generally finds the same directions of misalignment across currencies, with the notable exception of Switzerland. However, they criticize the Fund's methodology for conflating positive (observed pattern) and normative (systemically salutary) behavior, in particular by awarding high acceptable current account surplus targets, particularly to Singapore and Switzerland, because of financial center status and past accumulation of massive external assets.