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In Search of a Dramatic Equilibrium: Was the Armenian Dram Overvalued?  Nienke Oomes IMF Resident Representative in Armenia www.imf.org/yerevan with Gohar Minasyan & Ara Stepanyan
Outline ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
4. New IMF Program for Armenia ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Main measures under the government’s IMF program ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
2. Why was dram devaluation necessary? ,[object Object],[object Object],[object Object],[object Object],[object Object]
Real and nominal exchange rate
2. Why was dram devaluation necessary? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
3. Equilibrium Exchange Rate Estimates ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
3 (a)  Equilibrium real exchange rate : PPP approach ,[object Object],[object Object],[object Object],[object Object],[object Object]
Armenian prices are about 2/3 of U.S. prices
As productivity grows, actual XRs approach PPP XRs (real appreciation)
PPP approach: actual exchange rate appreciated faster than equilibrium exchange rate
PPP approach: 30% overvaluation in 2008
Drawbacks of PPP approach ,[object Object],[object Object],[object Object],[object Object]
3 (b) BEER Approach ,[object Object],[object Object],[object Object],[object Object]
BEER determinants ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Estimated cointegrating vector
BEER results: Equilibrium REER depreciated in 2008Q4, while actual REER appreciated…
...implying about 20 percent overvaluation at the end of 2008
Drawbacks of BEER assessments ,[object Object],[object Object],[object Object],[object Object],[object Object]
Nevertheless, the CBA’s BEER approach yields similar results
3 (c) External Sustainability (ES) Approach ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
ES approach: theory ,[object Object],[object Object],[object Object]
Baseline scenario ,[object Object],[object Object],[object Object]
Required Exchange Rate Adjustment ,[object Object],[object Object]
ES Approach: estimated overvaluation
Drawbacks of ES Approach ,[object Object],[object Object],[object Object]
4. Conclusions ,[object Object],[object Object]
Summary of results
But devaluation is not sufficient ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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In Search of a Dramatic Equilibrium: Was the Armenia n Dram Overvalued?