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Currency Misalignments and Exchange Rate Regimes in Latin American countries: A Trade-Off issue

Jorge Carrera, Blaise Gnimassoun, Valérie Mignon () and Romain Restout ()

Working Papers from CEPII research center

Abstract: This paper conducts an in-depth empirical investigation on the impact of the exchange rate regime (ERR) on real currency misalignments in a panel of 17 Latin American countries over the 1970-2016 period. We consider explicitly the two dimensions of misalignments, size and persistence, and evaluate four different ERR classifications. We also pay attention to cross-sectional dependencies across countries that appear to be important in Latin America, and provide several robustness checks. Our main findings show that, although fixed ERR perform well in limiting the size of misalignments – and in reducing inflation and fiscal deficit – the disequilibria are more persistent. On the contrary, allowing for more flexibility reduces persistence but increases the size of misalignments. Overall, we show that Latin American countries face a crucial trade-off when they have to choose their ERR.

Keywords: Latin American Countries; Exchange Rate Regimes; Currency Misalignments (search for similar items in EconPapers)
JEL-codes: F31 C23 E42 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-mac and nep-opm
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Working Paper: Currency misalignments and exchange rate regimes in Latin American countries: a trade-off issue (2020) Downloads
Working Paper: Currency misalignments and exchange rate regimes in Latin American countries: a trade-off issue (2020) Downloads
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