Real Exchange Rate Misalignment and Business Cycle Fluctuations in Asia and the Pacific

The study uses a panel vector autoregression involving consumer price index (CPI) inflation, output gap, short-term interest rate, and RER misalignment. It finds that RER overvaluation may lead to a reduction in CPI inflation and short-term interest rate. It also illustrates Asia and the Pacific’s diversity as evidenced by the output gaps of some economies, particularly in Southeast Asia, which are shown to be more susceptible to RER misalignment shocks.