REAL EXCHANGE-RATE BEHAVIOR AND ECONOMIC-PERFORMANCE IN LDCS

Examines the view that real exchange rate (RER) behavior and economic performance are correlated, using empirical evidence from a cross section of LDCs. On the methodological side, shows that measuring misalignment requires an empirical analysis of RER determinants because the usual simple comparison of purchasing power parity (PPP) rates over time is not a good indicator of disequilibrium situations affecting growth. In Section II, per capita growth is run against RER variability and a PPP-based index of misalignment, showing that the results are not satisfactory in the second case. The next section estimates a real exchange rate model combining time series with cross-sectional data. This model is then used to compute a regression-based index of misalignment that takes into consideration the difference between "sustainable' and actual values of the policy variables used as regressors. The correlation between this new measure of misalignment and several indicators of economic performance is analyzed. -from Authors