rupee? this is a wide and involved topic. so, i will restrict myself to a few major issues. 34. in a market determined exchange rate regime, any level of exchange rate at any point of time is an equilibrium value, reflecting the interactions of demand and supply. a market equilibrium exchange rate, however, is different from a fundamental equilibrium exchange rate ( feer ), as the latter can tell how misaligned the market exchange rate may be at any point of time. 35. john williamson, who pioneered the concept of feer, emphasised that the equilibrium rate is the rate which is consistent with internal balance – meaning full employment or full potential growth with low and stable inflation – and external balance – meaning a sustainable external balance position. the feer approach, however, ignores cyclical and speculative factors in determining the exchange rate path in the short - run. therefore some analysts view feer only as a medium - term concept. this being a normative approach, some also see it as the desired equilibrium exchange rate ( deer ) – internal and external balance being the obvious desires or objectives of policy. 36. there is another approach to estimating equilibrium exchange rate – known as the behavioural equilibrium exchange rate ( beer ), which tries to explain the behaviour of the exchange rate by accounting for sources of cyclical and temporary movements, while focusing on current fundamentals, unlike the sustainable external balance and internal balance focus of the feer. 37. given these conceptual building blocks of an equilibrium exchange rate, the imf ’ s consultative group on exchange rates ( cger ) uses three alternative methodologies to estimate fair values of exchange rates : ( i ) the macroeconomic balance ( mb ) approach, ( ii ) the equilibrium real exchange rate ( erer ) approach, and ( iii ) the external sustainability ( es ) approach. 38. the macroeconomic balance ( mb ) approach first estimates the difference between the projected current account balance ( cad ) position over the medium term at prevailing exchange rates, and the cad norm which is believed to be sustainable. then, the exchange rate adjustment that could eliminate this difference over the medium - term is estimated. the reduced - form equilibrium real exchange rate ( erer ) approach estimates directly an equilibrium real exchange rate for each country as a function of medium - term fundamentals such as the net foreign asset ( nfa ) position of the country, relative productivity differential bis central bankers ’ speeches between the tradable and non - tradable sectors,

’ s what we ’ ve seen in recent months and what we are watching closely. in october we will publish a new economic outlook. we will be looking for continued progress toward the economic rebalancing we need to relieve inflationary pressures and for more evidence that this is translating into lower underlying inflation. the 2 % target that brings me to a question we are increasingly getting from canadians : if it ’ s going to be difficult to get to our 2 % inflation target, and we ’ ll be closer to 3 % for some time, why don ’ t we raise the target to 3 %? besides, if the control range around the target is 1 % to 3 %, aren ’ t we close enough? we understand why people are asking this question. higher interest rates are painful. but getting to the 2 % target is worth it. i want to be clear — we are committed to the 2 % target. and for good reason. first, you don ’ t raise the target just because you missed it. we ’ ve been targeting 2 % inflation since 1995, and the inflation target anchors our economic and financial system. if you get rid of the anchor, or move it when the going gets tough, inflation itself gets less predictable and more volatile. nobody wants that. second, the 2 % target has delivered low and stable inflation and lower unemployment rates on average for 25 years in canada. most central banks have a 2 % target because, at 2 %, inflation is low enough that people don ’ t need to worry about changes in their cost of living from one year to the next. and we have a lot of evidence that, for many years now and in many countries, 2 % inflation has worked to deliver historically superior macroeconomic performance. third, the target is not 1 % to 3 % — it ’ s the 2 % midpoint of the range. the 1 % to 3 % range conveys where canadians can expect inflation to be most of the time. between 1995 and 2019, inflation was in the 1 % to 3 % range 80 % of the time. but to be in this range most of the time, we have to aim for the middle. if we decide 3 % is good enough, inflation will be above the range a lot of the time. - 9the bottom line is the 2 % target is eminently achievable and has served canadians well. simply put, when inflation is stable around the 2 % target, it removes the anxiety created by large