Real exchange rate misalignments

Abstract

This paper characterizes episodes of real appreciations and depreciations for a sample of 85 countries, approximately from 1960 to 1998. First, the equilibrium real exchange rate series are constructed for each country using Goldfajn and Valdes (1999) methodology (cointegration with fundamentals). Then, departures from equilibrium real exchange rate (misalignments) are obtained, and a Markov Switching Model is used to characterize the misalignments series as stochastic autoregressive processes governed by two states representing di¤erent means. Three are the main results we …nd: …rst, no evidence of di¤erent regimes for misalignment is found in some countries, second, some countries present one regime of no misalignment (tranquility) and the other regime with misalignment (crisis), and, third, for those countries with two misalignment regimes, the lower mean misalignment regime (appreciated) have higher persistence that the higher mean one (depreciated).