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A study on the determinants of the real exchange rate misalignments

Author

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  • Francisco Eduardo Pires de Souza
  • Viviane Luporini

Abstract

Departing from the literature that established a positive relation between exchangerate undervaluation and economic growth, this paper explores the causes of persistentundervaluation (or overvaluation) of the exchange rate. We first discuss the variablesthat could explain persistent misalignment of the real exchange rate on a theoretical basis.Then we present empirical evidence of the relation between those variables in selected countrygroups. We proceed by employing econometric models to estimate the overvaluation orundervaluation based on a panel dataset comprising 119 countries from 1980 to 2022. Ourfindings indicate that countries with higher savings rates, government debt, and openness to trade tend to exhibit a more undervalued currency, the opposite happening to countries withbetter terms of trade and larger capital inflows. JEL Classification: F31; F41; F43.

Suggested Citation

  • Francisco Eduardo Pires de Souza & Viviane Luporini, 2024. "A study on the determinants of the real exchange rate misalignments," Brazilian Journal of Political Economy, Center of Political Economy, vol. 44(4), pages 637-656.
    • Handle: RePEc:ekm:repojs:v:44:y:2024:i:4:p:637-656:id:2475
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    More about this item

    Keywords

    Real exchange rate; misalignments; undervaluation; growth;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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