Equilibrium Exchange Rates and Misalignments: The Case of Homogenous Emerging Market Economies

Working paper 713
Christian K. Tipoy, Marthinus C. Breitenbach & Mulatu F. Zerihun
Publication date: 
October, 2017

We compute the exchange rate misalignment for a set of emerging economies between 1980 and 2013 using the behavioural equilibrium exchange rate definition. The real equilibrium exchange rate is constructed using a parsimonious model and estimators that are robust to cross-sectional independence and small sample size bias. We find that these countries tend to intervene to avoid real appreciation of their currencies following a rise in relative productivity, casting doubt on the Balassa-Samuelson effect. East-Asian countries have maintained their currencies at an artificially low level in order to remain competitive and boost economic growth these past years.

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