Persistent real misalignments and the role of the exchange rate regime

- We assess the impact of exchange rate regimes on the real exchange rate dynamics.
- Fixed exchange rate regimes reduce the speed of real exchange rate convergence.
- Fixed exchange rate regimes increase the average real appreciation rate.
- Previous findings hold in the case of developing countries.
- The real exchange rate dynamics is inelastic to the regime in developed countries.

We assess, for a sample of 54 economies, the impact of de facto exchange rate regimes on both the persistence of real exchange misalignments and the average rate of real appreciation. We find that a fixed exchange rate regime reduces the speed of the real exchange rate's convergence to its equilibrium level. It also increases the average appreciation rate, but only in the case of developing economies. In developed countries, the real exchange rate dynamics is inelastic to the exchange rate regime.