A Network Model of Multilaterally Equilibrium Exchange Rates

Author/Editor:

Alexei P Kireyev ; Andrei Leonidov

Publication Date:

July 6, 2016

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper proposes a network model of multilaterally equilibrium exchange rates. The model introduces a topological component into the exchange rate analysis, consistently taking into account simultaneous higher-order interactions among all currencies. The paper defines the currency demand indicator. On its base, it derives a multilateral exchange rate network, finds its dynamically stationary position, and identifies the multilaterally equilibrium levels of bilateral exchanges rates. Potentially, the model can be developed further to calculate the deviations of the observed bilateral exchange rates from their multilaterally equilibrium levels, which can be interpreted as their over- or undervaluation. For illustration, the model is applied to daily 1995-2016 exchange rates among 130 currencies sourced from the Thomson Reuters Datastream.

Series:

Working Paper No. 2016/130

Subject:

Currencies Currency markets Exchange rate modelling Exchange rates Financial markets Foreign exchange Money Reserve currencies

English

Publication Date:

July 6, 2016

ISBN/ISSN:

9781498351331/1018-5941

Stock No:

WPIEA2016130

Pages:

23

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