Misalignment-Effects of Exchange Rate Regimes : Contrasting Words and Deeds

Résumé

Abstract
We study the misalignment-effects of exchange rate regimes by exploring two avenues. First, we assess the effects of de jure and de facto exchange rate regimes on average misalignment. Then, we analyze whether the average misalignment-impact of the exchange rate system stems from different probabilities of overvaluation and undervaluation. The empirical investigation proceeds in two steps. In the first one, non-stationary panel econometric techniques are used to estimate the relationship between the real exchange rate and its determinants. The estimated relationship is then used to compute the equilibrium real exchange rate and derive misalignment. In the second step, the effects of alternative de jure and de facto exchange rate systems on average misalignment and overvaluation are estimated over the period 1973-1999 in low-income, middle-income and high-income countries. The results show that misalignment is larger in fixed regimes than in floating ones, with middleincome and the CFA franc countries displaying the largest effect. This result likely stems from more frequent overvaluation episodes. Intermediate regimes are associated with the smallest misalignment in middle-income countries and a larger misalignment than floats in low and highincome countries. Only in the latter does this impact result from more frequent overvaluation episodes.

JEL classification : F31, F41