Exchange rate misalignments and the external balance under a pegged currency system

Blaise Gnimassoun ()
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Blaise Gnimassoun: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper analyzes the link between the exchange rate misalignments and the external balance under a pegged currency system focusing on the CFA zone. Having discussed and chosen an appropriate analytical framework, it addresses the issue of model uncertainty regarding the equilibrium exchange rate model before estimating currency misalignments. The results show that misalignments have a negative and asymmetric impact on the current account. While overvaluation of the CFA franc deteriorates the current account in the CFA zone, undervaluation does not improve it. Finally, our results highlight that the export concentration tends to exacerbate the overall negative impact of currency misalignments on the external balance. Thus, greater economic diversification is needed in an environment in which countries face both uncertainty in the terms of trade and uncertainty in the nominal exchange rate to conduct a proactive exchange rate policy.

Keywords: Currency peg; Exchange rate misalignments; Current account; concentration of exports; Bayesian model averaging. (search for similar items in EconPapers)
Date: 2015
Note: View the original document on HAL open archive server: https://hal.science/hal-04141421
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