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Correcting real exchange rate misalignment : conceptual and practical issues

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  • Eden, Maya
  • Nguyen, Ha

Abstract

This paper studies the issue of real exchange rate misalignment and the difficulties in settling international real exchange rate disputes. The authors show theoretically that determining when a country should be sanctioned for real exchange rate"manipulations"is difficult: in some situations a country's real exchange rate targeting can be beneficial to other countries, while in others it is not. Regardless, it is difficult to establish whether a misaligned real exchange rate is intentionally manipulated rather than unintentionally caused by other policies or by various distortions in the economy. The paper continues by illustrating the difficulty in measuring real exchange rate misalignment, and provides a critical assessment of existing methodologies. It concludes by proposing a new method for measuring real exchange rate misalignment based on differences in marginal products between producers of tradable and non-tradable goods.

Suggested Citation

  • Eden, Maya & Nguyen, Ha, 2012. "Correcting real exchange rate misalignment : conceptual and practical issues," Policy Research Working Paper Series 6045, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6045
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    References listed on IDEAS

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    1. S.K. Bhutani, 2009. "China and India," India Quarterly: A Journal of International Affairs, , vol. 65(4), pages 383-391, October.
    2. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2014. "Fiscal Devaluations," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 725-760.
    3. Arnaud Costinot & Guido Lorenzoni & Iván Werning, 2014. "A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 77-128.
    4. Korinek, Anton & Servén, Luis, 2016. "Undervaluation through foreign reserve accumulation: Static losses, dynamic gains," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 104-136.
    5. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
    6. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca A Ricci & Gian M Milesi-Ferretti, 2008. "Exchange Rate Assessments; CGER Methodologies," IMF Occasional Papers 261, International Monetary Fund.
    7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    Cited by:

    1. World Bank Group, 2014. "Third Ethiopia Economic Update : Strengthening Export Performance through Improved Competitiveness," World Bank Other Operational Studies 20026, The World Bank.
    2. Bonatti, Luigi & Fracasso, Andrea, 2013. "Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1044-1078.
    3. Luigi Bonatti & Andrea Fracasso, 2012. "The costs of rebalancing the China-US co-dependency," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 120(1), pages 59-106.
    4. Bernard M. Hoekman, 2013. "Global Governance of International Competitiveness Spillovers," RSCAS Working Papers 2013/33, European University Institute.
    5. World Bank Group, 2015. "Sudan Country Economic Memorandum," World Bank Other Operational Studies 25262, The World Bank.

    More about this item

    Keywords

    Currencies and Exchange Rates; Economic Stabilization; Debt Markets; Economic Theory&Research; Macroeconomic Management;

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