Concept: NEER + REER
Category: Currency valuation
Related News: Various Sources
CNA mentions: 1(July 22)
NEER + REER
An Effective Exchange Rate (EER) is an index which talks about the strength of a currency relative to a group of other currencies. If there are two currencies being compared, the term is called bilateral exchange rate. While calculating the effective exchange rate, the weighted average of a basket of foreign currencies is compared to a particular currency. This index basically describes the country’s external equity or competitiveness.
A NEER or nominal effective exchange rate is weighted with the inverse of the asymptotic trade weights. A REER or the real effective exchange rate is the effective weighted average of a currency relative to a basket of currencies and adjusted for inflation. NEER adjusted for the effects of inflation is REER.
The EER is can be used to estimate whether or not a currency has soared overall when compared to the country’s trading partners. But the EER values are volatile over shorter periods also and as such are not reliable for judging living standards between countries. The Purchasing Power Parity is better suited to measure that aspect.