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Institute for Economies in Transition, Bank of Finland BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland

No 25/2011:
Exchange rate misalignment estimates – Sources of differences

Yin-Wong Cheung () and Eiji Fujii

Abstract: We study the differences in currency misalignment estimates obtained from alternative datasets derived from two International Comparison Program (ICP) surveys. A decomposition exercise reveals that the year 2005 misalignment estimates are substantially affected by the ICP price revision. Further, we find that differences in misalignment estimates are systematically affected by a country’s participation status in the ICP survey and its data quality – a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The patterns of changes in estimated degrees of misalignment across individual countries, as exemplified by the BRIC economies, are highly variable.

Keywords: Penn effect regression; data revision; PPP-based data; measurement factors; economic factors; (follow links to similar papers)

JEL-Codes: C31; E01; F31; F40; (follow links to similar papers)

56 pages, November 11, 2011

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