Methodological Improvments Regarding the Exchange Rate Calculation of the Moldovan Leu

Abstract

The exchange rate has a direct impact on many macroeconomic indicators. The real exchange rate floating affects demand for exports and imports and, as a result, influence the trade balance, current account and production dynamics. An overvalued currency can lead to a current account deficit, and if such a deficit persists for a long time, it can lead to a currency crisis. The problem of an undervalued currency may seem less significant, but this has negative consequences too, such as low output growth in the non-tradable goods sector. In addition, it leads to the deterioration of the situation of the current account of the trading partner countries. Thus, deviations of exchange rates from their stable values are in most cases undesirable. In the practical way of estimating the equilibrium exchange rate, the main goal is to determine the real effective exchange rate (REER), since the dynamics of foreign trade and other flows reflected in the balance of payments depend on this indicator. In this study, in addition to estimating the level of fluctuation in real effective exchange rate needed to reach the equilibrium level, we also provide corresponding estimations for the nominal effective exchange rate and the real exchange rate of the Moldovan leu against the US dollar. Thus, the relevance of the research topic is determined by the fact that today there are many theories and methods of determining the nominal and real exchange rate. In this article we will analyze these theories and methods in detail and consider the perspectives to use them in the national practices. UDC: 336.748.01(478); JEL: E58, E52, G21, F37, F31, F32.