The effects of exchange rate regimes on real exchange rate misalignment

Abstract

The literature on exchange rate regimes has paid little attention to the effects of exchange rate policies on real exchange rate misalignments. This paper contributes to filling that gap by exploring such relation empirically. Because the underlying model is probably not linear and the treated individuals differ from non-treated individuals, we rely on Matching models rather than on standard regressions. Our main finding is that pegs are associated with more overvaluation. The results are robust to different exchange rate regime classifications, misalignment indexes, and matching estimators. The evidence presented suggests that policy-makers concerned with overvaluation should avoid sticking with rigid arrangements for too long.