INTERNATIONAL FINANCIAL INTEGRATIONAND REAL EXCHANGE RATE LONG-RUNDYNAMICS IN EMERGING COUNTRIES:SOME PANEL EVIDENCE

The aim of this paper is to provide new empirical evidence on the impact of international financialintegration on the long-run Real Exchange Rate (RER) in 39 developing countries belonging to threedifferent geographical regions (Latin America, Asia and MENA). It covers the period 1979-2004, andcarries out “second-generation” tests for non-stationary panels. Several factors, including internationalfinancial integration, are shown to drive the long-run RER in emerging countries. It is found that thenew financial environment characterised by international financial integration leads to a depreciationof the RER in the long run. Further, RER misalignments take the form of an under-valuation in mostMENA countries and an over-valuation in most Latin American and Asian countries....