REER and NEER Starter • What is it? REER • Real Effective Exchange Rate (REER) – the inflation adjusted exchange rate of one currency against a basket of currencies, weighted according to trade with each country NEER • Nominal Effective Exchange Rate (NEER) – the exchange rate of one currency against a basket of currencies, weighted according to trade with each country (not adjusted for inflation) Task • Explain the difference between the NEER and the REER (4) • Explain the difference between ‘internal devaluation’ and ‘external devaluation’ (4) Explain this… • Unlike Latvia, Iceland has a floating exchange rate. Iceland’s nominal effective exchange rate (NEER) index depreciated by almost 50% after the end of 2007. In comparison, Latvia’s NEER was broadly unchanged (see Fig. 4.2). • Latvia was more dependent on a change in its real effective exchange rate (REER), which depreciated by around 20% measured in terms of unit labour costs. • This compares to a 45% depreciation in Iceland’s REER based on changes in unit labour costs. Plenary • What are they?