Burden sharing and exchange rate misalignments within the Group of Twenty

We present equilibrium effective exchange rates for a set of industrial as well as developing countries, based on a methodology close to that used by Alberola et al. (2002), where the real exchange rate is jointly determined by external balance as well as internal balance. We then calculate equilibrium bilateral exchange rates against the US dollar. Finally, we investigate the size of bilateral misalignments depending on the number of flexible currencies within the G-20. To derive the full set of bilateral misalignments, we turn out the solution of adding an n+1th currency standing for the rest of the world, as this would imply G-20 countries transferring the burden of overall adjustment to third countries. Using various alternative numeraires, we show the diagnosis of bilateral misalignments to be robust for most currenci es. The lack of adjustment in some countries is shown to have an ambiguous effect on the adjustments beared by flexible currencies.