ABSTRACT
Discussion of exchange rate policy in Asia can benefit from more appropriate measures of exchange rates on a multilateral basis. Estimates of effective exchange rate (EER) can serve as a useful analytical tool and indicator for this purpose in several ways. They can be deployed, in ascending order of centrality, as a summary measure of external competitiveness, as an element in indices of monetary and financial conditions, as a reference for foreign exchange intervention policy, or even as an operating target for exchange rate policy. Looking across economies, perceptions of effective exchange rates, correct or otherwise, can affect how each economy reacts to its trading partners’ exchange rate changes. If policy makers consider a calculated effective exchange rate as a useful reference in policy discussions, then a proper measure is needed. Better measures of effective exchange rates could thus play their assigned role more appropriately and could even make inappropriate responses to currency movements less likely.1
