Skip to main content
The FRED® Blog

Posts tagged with: "CP0000EZ19M086NEST"

View this series on FRED

Constructing a bilateral real exchange rate

How to create new series on FRED

FRED lets you create commonly used data series that are not predefined. For example, you can normalize current account balances or government budget balances by GDP and you can deflate nominal data with a price index.

One popular variable that you can create is a bilateral real exchange rate index. While a nominal exchange rate is the relative price of 2 monies (e.g., the relative price of a euro in terms of U.S. dollars), a real exchange rate is the relative price of consumption baskets in two countries. A consumption basket is a set of goods and services that represent the purchases of a typical consumer in country in a given year. Thus the real exchange rate is the price of European goods in terms of U.S. goods. One converts a nominal exchange rate into a real rate by multiplying by the ratio of the national price levels:

U.S. goods per euro area goods basket = (USD per euro) * (euro price level) / (U.S. price level)

FRED has many kinds of broad, real effective exchange rates. Here is a list of FRED’s real U.S. exchange rates. These are effective or trade-weighted real exchange rates. They are weighted averages of bilateral real exchange rates. Currencies of the countries that the U.S. trade with the most receive the highest weights in the formula. Real effective exchange rates provide a look at changes in the overall value of foreign consumption baskets in terms of the U.S. consumption basket. When a real effective exchange rate rises (falls), the average foreign consumption basket becomes more (less) expensive in terms of U.S. consumption.

But what if you want to see the price of foreign consumption in terms of U.S. consumption for a particular country or area? For example, what if you want to see the real exchange rate for the dollar per euro, as we detailed at the start of the post? You can construct such a bilateral real exchange rate yourself in FRED using monthly price and exchange rate data from the U.S. and the euro area. The following instructions give you the graph at the top of this post.

1. Search for “euro” in the FRED search box and select “U.S. / Euro Foreign Exchange Rate.” The default graph will be a daily exchange rate (DEXUSEU).


2. Because consumer price series are monthly (or quarterly), use the orange “Edit Graph” button on the right hand side to change the frequency to monthly and the aggregation method to “average.” This series is series “a” in the graph. Keep the editing box open.

3. Add the U.S. and euro area CPI series using the “customize data” area.

a. To add the U.S. CPI data, type “cpi” directly under the text that says “You can begin by adding a series to combine with your existing series.” Click on the first series in the popup list called “Consumer price index for all urban consumers.” Click “Add” on the right-hand side of the box and the U.S. CPI series became series “b” in the graph. Note that the graph itself has not changed.

b. To add the euro area CPI data, type “euro cpi” directly under the text that says “You can begin by adding a series to combine with your existing series.” Click on the first series in the popup list called “Harmonized Index of Consumer Prices: All Items for the Euro Area.” Click “Add” on the right-hand side of the box and the euro CPI series became series “c” in the graph.

4. Now that we have defined our exchange rate and price series, we use them to construct a real exchange rate by typing the following formula in the “Formula” box near the bottom of the editing box: a*c/b. Then click “Apply” to the right of the box. The picture in the graph will finally change to the bilateral real exchange rate, i.e., baskets of U.S. goods per basket of euro area goods.

5. To change the real exchange rate to an index, select “Index (Scale value to 100 for chosen date)” from the “Units” box at the bottom of the editing box and then type “1999-01-01” in the date box. Close the edit box with the X in the upper right-hand corner.

6. To see a long span of the data series that you have created, select “Max” from the data range choices, i.e., “1Y | 5Y | 10Y | Max”, at the top of the graph.

Suggested by Chris Neely.

View on FRED, series used in this post: CP0000EZ19M086NEST, CPIAUCSL, DEXUSEU

Comovements in monetary policy

Revealing international correlations with FRED

Reporters and Fed watchers in the U.S. usually think about monetary policy in a domestic framework. But because business conditions, including commodity prices, are correlated internationally, central banks tend to move their policy rates up and down together and their inflation and interest rates tend to be correlated. FRED makes it easy to see these international comovements of macro and policy variables.

The first graph shows comovement in inflation rates from 1970 to the present for four economies: the U.S., Japan, the U.K., and the euro area. Inflation rose in the 1970s as central banks failed to combat the effects of commodity price increases on the general price level and inflation expectations became established.

Before the Financial Crisis of 2007-2009, almost all central banks in the developed world implemented monetary policy mainly by buying and selling short-term bonds to influence short-term interest rates or “policy rates.” The second graph shows the comovement in these policy rates from 1970 to the present for the Federal Reserve, the Bank of Japan, and the Bank of England: These central banks first hiked their policy rates in the 1979-1981 period to combat inflation and were then able to reduce those rates in the 1980s after inflation fell.

The second graph also shows that the Federal Reserve, the Bank of England, and the Bank of Japan lowered their short-term interest rates to zero during the Financial Crisis. To maintain price stability and continue to stimulate their economies, they turned to “unconventional” monetary policies that included buying long-term bonds to reduce long-term interest rates.

The value of the assets of central banks is one (albeit imperfect) way of measuring the monetary stimulus of unconventional policy. The third graph shows the assets of four central banks using an index for their values in 2008. The index value, rather than the value in each respective currency, allows a rough but easy comparison of the relative monetary stimulus. Central bank asset holdings have all increased greatly over the past decades. The Federal Reserve and the Bank of England had the first large responses in 2008-2009. The Bank of Japan began to accumulate assets in earnest starting in 2013. And the European Central Bank did likewise starting in 2015.

How these graphs were created: First graph: Search for “consumer price index for all urban consumers,” select the seasonally adjusted monthly version of the appropriate series, and click “Add to Graph.” From the “Edit Graph” panel’s “Add Line” tab, add the monthly versions of the three series “Consumer Price Index of All Items in Japan,” “Consumer Price Index of All Items in the United Kingdom,” and “Harmonized Index of Consumer Prices: All Items for Euro Area (19 Countries).” For each of these four lines, change the units to “Percent Change from Year Ago.” Lastly, change the start date to 1970-01-01.
Second graph: Search for “effective federal funds rate,” select the appropriate monthly series, and click “Add to Graph.” From the “Edit Graph” panel’s “Add Line” tab, add the monthly versions of the two series “Immediate Rates: Less than 24 hours: Central Bank Rates for Japan” and “Bank of England Policy Rate in the United Kingdom.” Lastly, change the start date to 1970-01-01.
Third graph: Search for “All Federal Reserve Banks: Total Assets,” select the appropriate series, and click “Add to Graph.” From the “Edit Graph” panel’s “Add Line” tab, add the three series “Bank of Japan: Total Assets for Japan,” “Total Central Bank Assets for United Kingdom,” and “Central Bank Assets for Euro Area (11-19 Countries).” For each of these four lines, change the units to “Index (Scale value to 100 for chosen date)” and select the date 2008-01-01. Lastly, change the start date to 2004-01-01.

Suggested by Chris Neely.

View on FRED, series used in this post: BOERUKM, CP0000EZ19M086NEST, CPIAUCSL, ECBASSETS, FEDFUNDS, GBRCPIALLMINMEI, IRSTCB01JPM156N, JPNASSETS, JPNCPIALLMINMEI, UKASSETS, WALCL


Subscribe to the FRED newsletter


Follow us

Back to Top