Real Exchange Rate Misalignment: A Panel Co-Integration and Common Factor Analysis

August 1, 2005

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Format: Chicago

Etienne B Yehoue, and Gilles J. Dufrénot Real Exchange Rate Misalignment: A Panel Co-Integration and Common Factor Analysis, (USA: International Monetary Fund, 2005) accessed October 6, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We combine some newly developed panel co-integration techniques and common factor analysis to analyze the behavior of the real exchange rate (RER) in a sample of 64 developing countries. We study the dynamic of the RER with its economic fundamentals: productivity, the terms of trade, openness, and government spending. We derive a number of common factors that explain the dynamic of the RER in our sample. We find that while some fundamentals such as productivity, terms of trade, and openness are strongly related to these common factors in low-income countries, no such link is found for the middle-income countries. We also derive the misalignment indices, which seem to reproduce recent episodes of overvaluation and undervaluation in a number of countries.

Subject: Currencies, Exchange rates, Foreign exchange, Money, Real effective exchange rates, Real exchange rates, Technology, Technology transfer

Keywords: Common factor, Confidence interval, Critical value, Currencies, Currency appreciation, Developing countries, Equilibrium exchange rate, Estimation result, Exchange rates, Global, Monetary policy, OLS estimator, Panel co-integration, Real effective exchange rates, Real exchange rate misalignment, Real exchange rates, Technology transfer, Terms of trade, Time series, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/164
Stock No:

WPIEA2005164
ISBN:

9781451861839
ISSN:

1018-5941

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