A study on the determinants of the real exchange rate misalignments

Francisco Eduardo Pires de Souza () and Viviane Luporini ()

Brazilian Journal of Political Economy, 2024, vol. 44, issue 4, 637-656

Abstract: Departing from the literature that established a positive relation between exchangerate undervaluation and economic growth, this paper explores the causes of persistentundervaluation (or overvaluation) of the exchange rate. We first discuss the variablesthat could explain persistent misalignment of the real exchange rate on a theoretical basis.Then we present empirical evidence of the relation between those variables in selected countrygroups. We proceed by employing econometric models to estimate the overvaluation orundervaluation based on a panel dataset comprising 119 countries from 1980 to 2022. Ourfindings indicate that countries with higher savings rates, government debt, and openness to trade tend to exhibit a more undervalued currency, the opposite happening to countries withbetter terms of trade and larger capital inflows. JEL Classification: F31; F41; F43.

Keywords: Real exchange rate; misalignments; undervaluation; growth (search for similar items in EconPapers)
Date: 2024
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