Exchange Rate Misalignment in Developing Countries

This article analyzes the theory of equilibrium real exchange rates and defines misalignment as a deviation of the real exchange rate (RER) from its equilibrium level. The role of macroeconomic policies is then analyzed under three alternative nominal exchange rate regimes: predetermined nominal exchange rates, floating nominal rates, and dual or black market nominal exchange rates. This discussion points out how inconsistent macroeconomic policies often lead to real exchange rate misalignment. Corrective measures, including nominal devaluations and several alternative approaches, are then evaluated.