Real exchange rate misalignment in developing countries: the role of exchange rate flexibility and capital account openness

Abstract

This paper examines the association between the real exchange rate (RER) misalignment, exchange rate flexibility, and capital account openness using a panel dataset for 60 developing countries over the period 1980 - 2014. The analysis is based on an alternative measure of RER that is more consistent with the theoretical concept of RER than the commonly used index, and misalignment estimates that account for country-specific underlying factors. The results suggest that the exchange rate regime and capital account policy are significantly related to the degree of persistence and the magnitude of RER misalignment. Show more