Real Equilibrium Exchange Rates: a Panel Data Approach for Advanced and Emerging Economies

Based on a behavioral equilibrium exchange rate model, this paper examines the determinants of the real effective exchange rate and evaluates the degree of misalignment of a group of currencies since 1980. Within a panel cointegration setting, we estimate the relationship between the exchange rate and a set of economic fundamentals, such as traded-nontraded productivity differentials and the stock of foreign assets. After having ascertained that the variables are integrated and cointegrated, the long-run equilibrium values of the fundamentals are estimated and used to derive equilibrium exchange rates and misalignments. Although there is statistical homogeneity, some structural differences exist between advanced and emerging economies.