Exchange Rate Misalignments and Crises

CESifo Working Paper Series No. 205

65 Pages Posted: 17 Jun 2001

See all articles by Jerome L. Stein

Jerome L. Stein

Brown University - Division of Applied Mathematics; CESifo (Center for Economic Studies and Ifo Institute)

Giovanna Paladino

IntesaSanpaolo; LUISS Economics Department

Date Written: November 1999


The problem is to evaluate the likelihood that a country will face a currency or balance of payments crisis over a given horizon. When is it rational for market participants to expect a depreciation of the currency? On the basis of considerable empirical studies we know that in both banking and currency crises, there is a multitude of weak and deteriorating economic fundamentals. Our theme is that there is an economic logic to medium and longer-term movements in exchange rates, within the context of a consistent dynamic stock-flow model. The equilibrium real exchange rate is a trajectory, not a point. We provide objective measures of the real fundamentals that determine the moving equilibrium real exchange rate, and explain the dynamic economic mechanism whereby the actual exchange rate converges to this moving equilibrium exchange rate, called the NATREX. The fundamentals are primarily social consumption/GDP, which is generally driven by fiscal policy, and the productivity of the economy. Trends in social consumption/GDP, and in fiscal policy, reflected political regime changes in France, Germany and Italy.

JEL Classification: F31, F32, F41, F43

Suggested Citation

Stein, Jerome L. and Paladino, Giovanna, Exchange Rate Misalignments and Crises (November 1999). CESifo Working Paper Series No. 205. Available at SSRN:

Jerome L. Stein (Contact Author)

Brown University - Division of Applied Mathematics ( email )

Providence, RI 02912
United States
401-863-2143 (Phone)
401-863-1355 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

Giovanna Paladino

IntesaSanpaolo ( email )

Piazza San Carlo
Torino, 10121

LUISS Economics Department ( email )

Viale di Villa Massimo, 57
Rome, 00161

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