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

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  • Etienne B Yehoue
  • Gilles J. Dufrénot

Abstract

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.

Suggested Citation

  • Etienne B Yehoue & Gilles J. Dufrénot, 2005. "Real Exchange Rate Misalignment; A Panel Co-Integration and Common Factor Analysis," IMF Working Papers 05/164, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:05/164
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    References listed on IDEAS

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    Cited by:

    1. Shuang Ding & Omar Al Shehabi, 2008. "Estimating Equilibrium Exchange Rates for Armenia and Georgia," IMF Working Papers 08/110, International Monetary Fund.
    2. Ciarlone, Alessio & Piselli, Paolo & Trebeschi, Giorgio, 2009. "Emerging markets' spreads and global financial conditions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 222-239, April.
    3. Shehu Usman Rano Aliyu, 2010. "Exchange rate volatility and export trade in Nigeria: an empirical investigation," Applied Financial Economics, Taylor & Francis Journals, vol. 20(13), pages 1071-1084.
    4. Jorge Carrera & Romain Restout, 2008. "Long Run Determinants of Real Exchange Rates in Latin America," Post-Print halshs-00276402, HAL.
    5. Bassem M Kamar & Jean-Etienne Carlotti & Russell C Krueger, 2009. "Establishing Conversion Values for New Currency Unions; Method and Application to the planned Gulf Cooperation Council (GCC) Currency Union," IMF Working Papers 09/184, International Monetary Fund.
    6. Shehu Usman Rano, Aliyu, 2007. "Real Exchange Rate Misalignment: An Application of Behavioral Equilibrium Exchange Rate (BEER) to Nigeria," MPRA Paper 10376, University Library of Munich, Germany.
    7. Mark W Lewis & Aurelie Martin & Gabriel Di Bella, 2007. "Assessing Competitiveness and Real Exchange Rate Misalignment in Low-Income Countries," IMF Working Papers 07/201, International Monetary Fund.
    8. Mahvash S Qureshi, 2008. "Africa’s Oil Abundance and External Competitiveness; Do Institutions Matter?," IMF Working Papers 08/172, International Monetary Fund.
    9. Couharde, Cécile & Coulibaly, Issiaka & Damette, Olivier, 2013. "Anchor currency and real exchange rate dynamics in the CFA Franc zone," Economic Modelling, Elsevier, vol. 33(C), pages 722-732.
    10. nnamdi, Kelechi & ifionu, Ebele, 2013. "Exchange rate volatility and exchange rate uncertainty in Nigeria: a financial econometric analysis (1970- 2012)," MPRA Paper 48316, University Library of Munich, Germany, revised 2013.
    11. Oliver Hossfeld, 2010. "Equilibrium Real Effective Exchange Rates and Real Exchange Rate Misalignments: Time Series vs. Panel Estimates," FIW Working Paper series 065, FIW.
    12. repec:rmk:rmkbae:v:4:y:2017:i:2:p:57-64 is not listed on IDEAS
    13. Jesús Ferreyra & Jorge Salas, 2006. "The Equilibrium Real Exchange Rate in Peru: BEER Models and Confidence Band Building," Working Papers 2006-006, Banco Central de Reserva del Perú.
    14. Yougbaré, Lassana, 2011. "Exchange rate arrangements and misalignments: contrasting words and deeds," MPRA Paper 32362, University Library of Munich, Germany.
    15. Atsushi Iimi, 2006. "Exchange Rate Misalignment; An Application of the Behavioral Equilibrium Exchange Rate (BEER) to Botswana," IMF Working Papers 06/140, International Monetary Fund.
    16. Elbadawi, Ibrahim A. & Kaltani, Linda & Schmidt-Hebbel, Klaus, 2007. "Post-conflict aid, real exchange rate adjustment, and catch-up growth," Policy Research Working Paper Series 4187, The World Bank.
    17. Diego Bastourre & Jorge Carrera & Javier Ibarlucia & Mariano Sardi, 2012. "Common Drivers in Emerging Market Spreads and Commodity Prices," BCRA Working Paper Series 201257, Central Bank of Argentina, Economic Research Department.
    18. Cuiabano, Simone & Opoku-Afari, Maxwell, 2017. "Exchange rate dynamics and monetary integration in the EAC contries," TSE Working Papers 17-848, Toulouse School of Economics (TSE).
    19. Coulibaly, Issiaka & Gnimassoun, Blaise, 2013. "Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa," Economic Modelling, Elsevier, vol. 32(C), pages 463-482.
    20. niaz ahmad mohd, Naseem & yusop, Zulkornain & masron, Tajul ariffin, 2009. "How did the Malaysian real exchange rate misalign during the 1997 Asian crisis?," MPRA Paper 44922, University Library of Munich, Germany.
    21. Marcos Rocha & Fernando Barbi, 2011. "Determinantes doDesalinhamento Cambial: Uma análise comcointegração em painel," Anais do XXXVII Encontro Nacional de Economia [Proceedings of the 37th Brazilian Economics Meeting] 112, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    22. Megumi Kubota, "undated". "Real Exchange Rate Misalignments: Theoretical Modelling and Empirical Evidence," Discussion Papers 09/24, Department of Economics, University of York.

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