The Impact of Currency Misalignment on Trade Balance of Emerging Market Economies
Abdullahil Mamun
International Islamic University Chittagong, Bangladesh
Emrah Eray Akça
Çukurova University, Turkey
Harun Bal
Çukurova University, Turkey
Published 2021-12-22


trade balance
real exchange rate misalignment
emerging market economies

How to Cite

Mamun A., Akça E. E. and Bal H. (2021) “The Impact of Currency Misalignment on Trade Balance of Emerging Market Economies”, Organizations and Markets in Emerging Economies, 12(2), pp. 285-304. doi: 10.15388/omee.2021.12.57.


This study is an attempt to examine the impact of currency misalignment on the trade balance of emerging market economies from 1980 through 2016. It firstly measures the equilibrium RER and corresponding misalignment series of 21 EMEs separately adopting a single equation approach and then includes them in the trade regression together with undervaluation and overvaluation to estimate the dynamic relationship between the trade balance and real exchange rate misalignment employing the system generalized method of moment estimation approach. The study suggests that, being a composite series of undervaluation and overvaluation, higher real exchange rate misalignment helps recover trade imbalances. It also identifies that undervaluation improves trade balance, while overvaluation cuts it down. The study identifies that the misalignment series of RER for most of the EMEs are substantially dominated by overvaluation episodes, and hence the opposing impact of undervaluation and currency misalignment on the trade balance of EMEs is not surprising. From the policy perspective, competitiveness achieved through currency movements helps emerging market economies not only to improve trade balance but also to withstand vulnerability that arises from huge external borrowings creating a strong external payment position.



Abbas, S., Nguyen, V. C., Yanfu, Z., & Nguyen, H. T. (2020). The impact of China exchange rate policy on its trading partners evidence based on the GVAR model. Journal of Asian Finance, Economics and Business, 7(8), 131-141.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58, 277–297.

Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68, 29–51.

Auboin, M., & Ruta, M. (2013). The relationship between exchange rates and international trade: A literature review. World Trade Review, 12(3), 577-605.

Bajo-Rubio, O., Berke, B., & Esteve, V. (2016). The effects of competitiveness on trade balance: The case of Southern Europe. Economics: Open-Assessment E-Journal, 10(30), 1-27.

Bahmani-Oskooee, M., & Brooks, T.J. (1999). Bilateral J-curve between U.S. and her trading partners. Weltwirtschaftliches Archive, 135(1), 156–165.

Baldwin, R. & Krugman, P. (1989). Persistent trade effects of large exchange rate shocks. The Quarterly Journal of Economics, 104(4), 635-654.

Banerjee, K., & Goyal, A. (2021). Behavioural equilibrium real exchange rates and misalignments: Evidence from large emerging markets. Economic Analysis and Policy, 70, 414-436.

Béreau, S., Villavicencio, A.L., & Mignon, V. (2012). Currency misalignments and growth: A new look using nonlinear panel data methods. Applied Economics, 44(27), 3503-3511.

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115–143.

Bond, S.R., Hoeffler, A., & Temple, J. (2001). GMM estimation of empirical growth models. Economics Papers, Working Paper No. 21, Nuffield College, University of Oxford.

Broz, J. L., & Frieden, J. A. (2006). The political economy of exchange rates. In B. Weingast & D. Wittman (Eds.), Oxford Handbook of Political Science (pp. 587-97). Oxford University Press. http://doi:10.1093/oxfordhb/9780199548477.003.0032

Caporale, G. M., Hadj Amor, T., & Rault, C. (2011). International financial integration and real exchange rate long-run dynamics in emerging countries: Some panel evidence. The Journal of International Trade & Economic Development, 20(6), 789-808.

Chiu, Y. B., & Ren, R. (2019). Trade balance, savings rate, and real exchange rate: Evidence from China and its trading partners. Emerging Markets Finance and Trade, 55(2), 351-364.

Clark, P. B., Bayoumi, T., Bartolini, L., & Symansky, S. A. (1994). Exchange rates and economic fundamentals: A framework for analysis. IMF Occasional Paper.

Duttagupta, R., & Pazarbasioglu, C. (2021). MILES to go. International Monetary Fund Finance & Development. Available Online:

Edwards, S. (1989). Exchange rate misalignment in developing countries. The World Bank Research Observer, 4(1), 3-21.

Edwards, S., & Savastano, M. A. (1999). Exchange rates in emerging economies: What do we know? What do we need to now? NBER Working Paper 7228, Cambridge, MA.

Edwards, L., & Golub, S. S. (2004). South Africa’s international cost competitiveness and exports in manufacturing. World Development, 32(8), 1323-1339.

Elbadawi, I. A. (1994). Estimating long-run equilibrium real exchange rates. In J. Williamson (Ed.), Estimating equilibrium exchange rates. Institute for International Economics, Washington, D.C.

Hsiao, Y. M., Pan, S. C., & Wu, P. C. (2012). Does the central bank’s intervention benefit trade balance? Empirical evidence from China. International Review of Economics and Finance, 21(1), 130–139.

IMF (1984). Exchange Rate Volatility and World Trade. International Monetary Fund, Washington, D.C., United States.

IMF (2018). World Economic Outlook Report. Available Online:

Iyke, B. N., & Ho, S. Y. (2017). The real exchange rate, the Ghanaian trade balance, and the J-curve. Journal of African Business, 18(3), 380-392.

Iyke, B. N., & Ho, S. Y. (2018). Nonlinear effects of exchange rate changes on the South African bilateral trade balance. The Journal of International Trade & Economic Development, 27(3), 350-363.

Ju, J., Wu, Y., & Zeng, L. (2010). The impact of trade liberalization on the trade balance in developing countries. IMF Staff Papers, 57(2), 427-449.

Jongwanich, J. (2009). Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia. Asian Development Bank Economics Working Paper Series, No: 151.

Kodongo, O., & Ojah, K. (2013). Real exchange rates, trade balance and capital flows in Africa. Journal of Economics and Business, 66, 22-46.

Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2012). International Economics: Theory and Policy. Addison-Wesley, Massachusetts, USA.

Magud, N., & Sosa, S. (2013). When and why worry about real exchange rate appreciation? The missing link between Dutch disease and growth. Journal of International Commerce, Economics and Policy, 04(02), 1–27.

Mamun, A., Bal, H., & Akça, E. E. (2019). The export-output growth nexus in Bangladesh: A leveraged bootstrap approach. Journal of Asia Business Studies, 13(2), 196-213.

McCausland, W. D. (2002). Exchange rate hysteresis: The effects of overshooting and short‐termism. Economic Record, 78(240), 60-67.

Montiel, P. J. (2007). Equilibrium real exchange rates, misalignment and competitiveness in the Southern Cone. CEPAL, Economic Development Division, United Nations Publications, Santiago, Chile.

Nasir, M. A., & Jackson, K. (2019). An inquiry into exchange rate misalignments as a cause of major global trade imbalances. Journal of Economic Studies, 46(4), 902-924.

Nicita, A. (2013). Exchange rates, international trade and trade policies. International Economics, 135, 47-61.

Nouira, R., Plane, P., & Sekkat, K. (2011). Exchange rate undervaluation and manufactured exports: A deliberate strategy? Journal of Comparative Economics, 39(4), 584-601.

Odedokun, M. O. (1997). An empirical analysis on the determinants of the real exchange rate in African countries. Journal of International Trade & Economic Development, 6(1), 63-82.

Rikhotso, P., & Bonga-Bonga, L. (2021). Exchange rate misalignments and current accounts in BRICS countries. MPRA Working Paper No. 170973.

Schröder, M. (2017). The equilibrium real exchange rate and macroeconomic performance in developing countries. Applied Economics Letters, 24(7), 506–509.

Sekkat, K., & Varoudakis, A. (2000). Exchange rate management and manufactured exports in Sub-Saharan Africa. Journal of Development Economics, 61(1), 237-253.

Staiger, R. W., & Sykes, A.O. (2010). Currency manipulation and world trade. World Trade Review, 9(4), 583-627.

Tan, K. G., Trieu Duong, L. N., & Chuah, H. Y. (2019). Impact of exchange rates on ASEAN’s trade in the era of global value chains: An empirical assessment. The Journal of International Trade & Economic Development, 28(7), 873–901.

BRUEGEL (2020).

FRED (2020).

IMF-IFS (2020).

OECD (2020).

UNCTAD (2020).

WB-WDI (2020).

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Please read the Copyright Notice in Journal Policy.