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Foreword -- About the authors -- Acknowledgments -- Acronyms and abbreviations -- 1. Exchange rate misalignment: an overview / Peter J. Montiel and Lawrence E. Hinkle -- Pt. 1. The real exchange rate: concepts and measure: 2. External real exchange rates: purchasing power parity, the mundell-fleming model, and competitiveness in traded goods / Lawrence E. Hinkle and Fabien Nsengiyumva -- 3. The two-good internal RER for tradables and nontradables / Lawrence E. Hinkle and Fabien Nsengiyumva -- 4. The three-good internal RER for exports, imports, and domestic goods / Lawrence E. Hinkle and Fabien Nsengiyumva -- Pt. 2. Determinants of the equilibrium real exchange rate -- 5. The long-run equilibrium real exchange rate: conceptual issues and empirical research / Peter j. Montiel -- 6. Determinants of the Long-Run equilibrium real exchange rate: an analytical model / Peter J. Montiel -- Pt. 3. Methodologies for estimating the equilibrium RER: empirical applications -- 7. Estimating the equilibrium real exchange rate empirically operational approaches / Theodore O. Ahlers and Lawrence e. Hinkle -- 8. Estimates of real exchange rate misalignment with a simple general-equilibrium model / Shantayanan Devarajan -- 9. Long-Run real exchange rate changes in developing countries: simulations from an econometric model / Nadeem Ul haque and Peter J. Montiel -- 10. Single-equation estimation of the equilibrium real exchange rate / John Baffes, Ibrahim A. Elbadawi, and Stephen A. O' Connell -- Pt. 4. Policy and operational considerations -- 11. The three pessimisms: real exchange rates and trade flows in developing countries / Nita Ghei and Lant Pritchett -- 12. The use of the parallel market rate as a guide to setting the offiecial exchange rate / Nita Ghei and Steven B. Kamin -- 13. A note on nominal devaluations. inflation, and the real exchange rate / Nita Ghei and Lawrence E. Hinkle -- References -- Index.

The study cautiously identifies exchange rate misalignment as an important element in most of the exchange rate crises that plagued the developing world during the last decade. Given that the increasing integration of world capital markets, has escalated the costs of such crises, a broad consensus emerged in recent years, that the overriding objective of exchange rate policy in developing countries, should be to avoid episodes of prolonged, and substantial misalignment, i.e., situations in which the actual real exchange rate differs significantly from its long-run equilibrium value. It was the Bank ' s involvement in one such misalignment episode, that eventually led to this book. Following an overview on the concepts and measurement of exchange rate misalignment, its impact on the purchasing power parity, and the relationship between the external real exchange rate (RER), and the two-good internal RER for tradables non-tradables, the study presents methodologies - empirical applications - for estimating the RER equilibrium. The study reaches an optimistic conclusion - that enough is known to identify cases of misalignment, and be able to sound clear warning signals. The implication for exchange rate policy is that ignorance about the empirical value of the equilibrium exchange rate, cannot be used to clinch arguments for extreme exchange arrangements, such as clean floats, currency boards, and " dollarization ".