Exchange Rate Regime Choices and Real Effective Exchange Rate Misalignments: Degree and Persistence

Abstract

This paper assesses the impact of de facto exchange rate regime (ERR) choices on the magnitude and the persistence of multilateral price levels-based (also known as real effective exchange rate, REER) misalignments in a large sample of countries (126) over the period 1990–2019. This paper considers the random effects within-between (REWB) framework to evaluate the degree of REER misalignments and the novel mean-group instrumental variables (MGIV) to estimate the persistence of the REER misalignments. This paper finds that both fixed and intermediate ERRs perform better in limiting the degree of REER misalignment than the floating ERRs Furthermore, this paper finds evidence of the strongest persistence of REER misalignment in the fixed and intermediate ERRs. These results indicate that the choice of ERR is relevant to REER misalignment. JEL codes: C33, F32, F31, F33, F41