2 Framework
The behaviour of exchange rates is usually discussed over three timeframes. Distinguishing between them is important as they each have different characteristics, drivers and potential implications for policy.
The long-run level of the exchange rate reflects some notion of an equilibrium real exchange rate. Medium-term cycles (variability) reflect multi-year deviations away from this equilibrium level. Short-term volatility is seen as fluctuations away from the medium-term cycles. The short-term fluctuations are deemed to be those ranging from day-to-day up to a one year horizon.[3]
Notes
- [3]For a more detailed description of these different time horizons see Mabin (2010).
