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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:Measuring exchange rate misalignment: inflation differentials and domestic relative prices
Authors:Masters, William A.ISNI
Ianchovichina, ElenaISNI
Year:1998
Periodical:World Development
Volume:26
Issue:3
Pages:465-477
Language:English
Geographic term:Zimbabwe
Subject:exchange rates
External link:https://doi.org/10.1016/S0305-750X(97)10061-4
Abstract:Exchange rate misalignment has long been one of the most controversial issues in international economics. Empirical studies on the subject generally use cross-country differences in overall inflation as proxy measures for a country's real exchange rate (RER). This article shows that using such differential-inflation proxies introduces two systematic biases in model results: understatement of RER movements; and a spurious trend towards depreciation. These biases can be corrected only with disaggregated data on domestic relative prices of tradeable and nontradeable products. Using a standard model with disaggregated data for Zimbabwe covering the period 1967-1987, the authors find that proxy-based results understate misalignment by almost 25 percent and exaggerate depreciation by 4 percent per year. Bibliogr., notes, ref., sum.
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