Real Exchange Rate Misalignment: A Panel Co-Integration and Common Factor Analysis

39 Pages Posted: 3 Mar 2006

See all articles by Gilles Dufrénot

Gilles Dufrénot

GREQAM and Aix-Marseille School of Economics

Etienne B. Yehoue

International Monetary Fund (IMF)

Date Written: August 2005

Abstract

We combine some newly developed panel co-integration techniques and common factor analysis to analyze the behavior of the real exchange rate (RER) in a sample of 64 developing countries. We study the dynamic of the RER with its economic fundamentals: productivity, the terms of trade, openness, and government spending. We derive a number of common factors that explain the dynamic of the RER in our sample. We find that while some fundamentals such as productivity, terms of trade, and openness are strongly related to these common factors in low-income countries, no such link is found for the middle-income countries. We also derive the misalignment indices, which seem to reproduce recent episodes of overvaluation and undervaluation in a number of countries.

Keywords: Real exchange rate misalignment, panel co-integration, common factor, developing countries

JEL Classification: E31, F0, F31, C15

Suggested Citation

Dufrénot, Gilles and Yehoue, Etienne Baba, Real Exchange Rate Misalignment: A Panel Co-Integration and Common Factor Analysis (August 2005). IMF Working Paper No. 05/164, Available at SSRN: https://ssrn.com/abstract=888033

Gilles Dufrénot (Contact Author)

GREQAM and Aix-Marseille School of Economics ( email )

Centre de la vieille Charité
2 rue de la Charité
13002 Marseille, 13236
France

Etienne Baba Yehoue

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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