Exchange rate arrangements and misalignments: contrasting words and deeds

Abstract

The paper studies the misalignment2-exchange rate regime linkages by pursing three avenues. First, does misalignment vary across alternative de jure and de facto exchange rate systems? Second, can these misalignment-effects be explained by different probabilities of undervaluation and overvaluation episodes? Lastly, does delivering the promised exchange rate regime pay off? The regression analysis reveals that misalignment is larger in fixed systems, with middle income and the CFA countries displaying the largest effect. This result likely stems from more (less) frequent overvaluation (undervaluation) episodes. Intermediate regimes are found to be associated with a smaller misalignment in middle income countries and a larger misalignment in low and high income countries. But only in the latter does this misalignment-impact appear to result from more frequent overvaluation episodes. In the other groups of countries it may come from over and undervaluation episodes with different magnitudes.equilibrium real exchange rate; misalignment; exchange rate regimes