I am struggling with something as simple as real exchange rate calculation!
I get the theory: RER = NOM * (P*/P) i.e. nominal exchange rate times price level ratios. Apparently, using CPI (consumer price index) is common practice for P.
I have the nominal exchange rate and I have both CPI for country A and country B as index 100=2005.
What I don't understand is that in 2005, the nominal rate = real exchange rate. But that makes sense only because of the 2005 index - not in the real world. What am I doing wrong?