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

Author/Editor:

Etienne B Yehoue ; Gilles J. Dufrénot

Publication Date:

August 1, 2005

Electronic Access:

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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.

Series:

Working Paper No. 2005/164

Subject:

Currencies Exchange rates Foreign exchange Money Real effective exchange rates Real exchange rates Technology Technology transfer

English

Publication Date:

August 1, 2005

ISBN/ISSN:

9781451861839/1018-5941

Stock No:

WPIEA2005164

Pages:

39

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