Assessing real exchange rate misalignments
There is a renewed debate on the role of exchange rate policies as an industrial policy tool in both academic and policy circles. Policy practitioners usually examine real exchange rate misalignments to monitor the behavior of this key relative price and, if possible, exploit distortions in the traded and non-traded relative price to promote growth. Anecdotal evidence shows that some countries have pursued very active exchange rate policies to promote the export sector and enhance growth by undervaluing their currencies. The main goal of this paper is to provide a systematic characterization of real exchange rate undervaluations. The long-run real exchange rate equation is estimated using: (a) Johansen time series cointegration estimates, and (b) pooled mean group estimates for non-stationary panel data. The paper constructs a dataset of real undervaluation episodes. It first evaluates whether (and if so, to what extent) economic policies can be used to either cause or sustain real undervaluations. In this context the paper empirically models the likelihood and magnitude of sustaining real exchange rate undervaluations by examining their link to policy instruments (such as exchange rate regimes and capital controls, among other policies) using probit and Tobit models. Finally, it investigates whether foreign exchange intervention can generate persistent real exchange rate deviations from equilibrium. In general, it finds that intervention can lead to greater persistence in the incidence and magnitude of real exchange rate undervaluations.
|Date of creation:||01 Dec 2011|
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- Jeffrey A. Frankel & Eduardo A. Cavallo, 2004.
"Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality,"
NBER Working Papers
10957, National Bureau of Economic Research, Inc.
- Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
- Eduardo A. Cavallo & Jeffrey Frankel, 2007. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Research Department Publications 4544, Inter-American Development Bank, Research Department.
- Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series rwp04-038, Harvard University, John F. Kennedy School of Government.
- Calderon, Cesar & Kubota, Megumi, 2009. "Does higher openness cause more real exchange rate volatility ?," Policy Research Working Paper Series 4896, The World Bank.
- K. Doroodian & Tony Caporale, 2001. "Central bank intervention and foreign exchange volatility," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 7(4), pages 385-392, November.
- Yin-wong Cheung & XingWang Qian, 2007. "Hoarding of International Reserves: Mrs Machlup¡¦s Wardrobe and the Joneses," Working Papers 132007, Hong Kong Institute for Monetary Research.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2002.
"The Modern History of Exchange Rate Arrangements: A Reinterpretation,"
NBER Working Papers
8963, National Bureau of Economic Research, Inc.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
- Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
- repec:kap:iaecre:v:7:y:2001:i:4:p:385-392 is not listed on IDEAS
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