What is a TWI?

TWI = Trade Weighted Index A multilateral exchange rate which is a weighted average of exchange rates of foreign currencies, with the weight for currency based on its share in trade. It measures the average price of goods relative to the average price of goods of trading partners.

What is it for?
A tool for measuring: direct influence of exchange rate movements on prices indirect influence of the exchange rate on inflation through influence on external sector competitiveness If the index increases, the purchasing power of that currency is higher (the currency strengthened against the country's trading partners). A lower index means that the currency depreciated (devaluation) so that you need more of that currency to pay for imports. Provides a measure of relative value against a range of currencies you are interested in.

NEER
The NEER is the weighted geometric average of the bilateral nominal exchange rates of the home currency in terms of foreign currencies. The weights are determined by the importance a home country places on the other currencies within the pool usually based on trade.

REER
Real Effective Exchange Rate
a real TWI

Same as NEER, but adjusted for inflation Better measure of competitiveness over time
takes into account price movements

A higher REER indicates lower competitiveness as it costs more to produce similar goods.

Important decisions
Pick the relevant currencies
Trade flow? Policy goals will provide guide

Determine appropriate weights

Which way to weight? How often to re-weight?

Choosing Appropriate Currencies

Trade flows
Just exports?
if export competitiveness is the primary goal

Just imports?
If imported price inflation is key priority

All trade?

Other currency flows

Remittances Capital/grants

Completeness vs ease of calculation