Does Mixed Frequency Vector Error Correction Model Add Relevant Information to Exchange Misalignment Calculus? Evidence for United States

Abstract

Real exchange rate is an important macroeconomic price in the economy and affects economic activity, interest rates, domestic prices, trade and investments flows among other variables. Methodologies have been developed in empirical exchange rate misalignment studies to evaluate whether a real effective exchange is overvalued or undervalued. There is a vast body of literature on the determinants of long-term real exchange rates and on empirical strategies to implement the equilibrium norms obtained from theoretical models. This study seeks to contribute to this literature by showing that it is possible to calculate the misalignment from a mixed cointegrated vector error correction framework. An empirical exercise using United States' real exchange rate data is performed. The results suggest that the model with mixed frequency data is preferred to the models with same frequency variables.