Exchange Rate Regime, Real Misalignment and Currency Crises

Posted: 20 Jul 2017

See all articles by Oliver Holtemöller

Oliver Holtemöller

Halle Institute for Economic Research; Martin Luther University Halle-Wittenberg

Sushanta Mallick

Queen Mary - University of London

Multiple version iconThere are 2 versions of this paper

Date Written: 2013


Based on 69 sample countries, this paper examines the effect of macroeconomic fundamentals on real effective exchange rates (REER) in these sample countries. Using the misalignment of actual REER from its equilibrium level, we have estimated the factors explaining the extent of currency over- or under-valuation. Overall, we find that the higher the flexibility of the currency regime, the lower is the misalignment. The estimates are robust to different sub-samples of countries. We then explore the impact of such misalignment on the probability of a currency crisis in the next period, indicating the extent to which misalignment could be used as a leading indicator of a potential crisis. This paper thus makes a new contribution to the debate on the choice of exchange rate regime by bringing together real exchange rate misalignment and currency crisis literature.

Keywords: Fundamental equilibrium exchange rate, Pooled time series regression, Real exchange rate misalignment, Currency crisis

JEL Classification: C33, F31, F41

Suggested Citation

Holtemöller, Oliver and Mallick, Sushanta K., Exchange Rate Regime, Real Misalignment and Currency Crises (2013). Economic Modelling, Vol. 34, 2013. Available at SSRN:

Oliver Holtemöller (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108

Martin Luther University Halle-Wittenberg ( email )

Halle-Wittenberg, Sachsen-Anhalt

Sushanta K. Mallick

Queen Mary - University of London ( email )

School of Business and Management
Mile End Road
London, England E1 4NS
United Kingdom
+44 20 7822 7447 (Phone)


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