Jul

27

2013

## Computing NEER, REER and TWI

Posted by Vitalie Ciubotaru## Notation conventions

denotes the amount of imports from country *i* in period *t*.

denotes total imports of the home country in period *t*. Strictly speaking, we don’t need total imports to compute the weights, but it is good to know the combined weight of the selected countries in the total (computing the shares of *all* trading partners is usually infeasible).

## Definitions

### Nominal EER

**Nominal Effective Exchange Rate** shows the average value of domestic currency against a pool of foreign currencies. A value higher than 1 means nominal appreciation of domestic currency.

where:

denotes the bilateral exchange rate of country *i*‘s currency in period *t* (direct quotation — units of domestic currency per unit of foreign currency).

denotes the weight of country *i* and it’s currency in the index. Weights should sum up to unity.

Comment: We could lend more elegance to our formula if we use indirect quotation.

### Real EER

**Real Effective Exchange Rate** shows the inflation-adjusted average value of domestic currency against a pool of foreign currencies. A value higher than 1 means real appreciation (i.e. an increase in the purchasing power) of domestic currency.

where:

denotes the home country’s price index in period *t*.

denotes the price index of country *i* in period *t*.

### Trade-Weighted Index

**Trade-Weighted Index** shows the average value of a pool of foreign currencies in terms adjusted for foreign inflation.

TWI can be easily computed from NEER or REER:

or