Estimate The Equilibrium Real Effective Exchange Rate Of The Algerian Dinar : A Recent Empirical Study (1981-2008)

Abstract: The real effective exchange rate (REER) plays an important role in the broad allocation of resources in production. The REER, as a measure of competitiveness, also determines and influences the performance of export sector. This paper estimates the long-run relationship between the REER and fundamentals: terms of trade, net foreign assets and productivity. This paper employs the behaviour equilibrium exchange rate (BEER) model to estimate the equilibrium real effective exchange rate of Algerian dinar (DZD) and exchange rate misalignments in Algeria, with covers the period and annual data from (1981-2008), by using advanced cointegration testing techniques as developed by (Johansen,1988) and (Johansen-Juselius,1990)1 vector error correction model2, the existence of cointegrating relationships among fundamental variables3 and real effective exchange rate4 can be effectively analyzed. The analysis concludes that (REER) appreciates with productivity and term of trade but, with, net foreign assets depreciate. Generally, lower misalignments are linked to more flexible exchange rate regimes then to fixed regimes5