Exchange Rate Misalignment:
For Some a Strategy, for Others a Downfall Writer Abby Fehler Researcher Diquan Xian
T
he economies of developing countries face many interesting problems, many of which involve trade. For the leaders of developing nations, economic stability is crucial to maintaining political stability. As seen in countries such as Venezuela, economic instability can cause mass protests, violence, and political turmoil. Terefore, a strong economy is one of the most legitimizing forces for the government of a developing country, and many leaders will go
to extreme lengths to maintain a strong economy. Exchange rate misalignment acts as one example. In one way, misalignment can cause the GDP of a country to decrease, and in another, a more purposeful way, exchange rate misalignment can assist in the growth of exportoriented countries, and lead to an increase in GDP. However, this “positive” efect is only temporary and may lead to severe issues in the future. Exchange rate misalignment can be a complex economic problem,
requiring immediate government intervention, or it can also be used as an economic strategy, in order to give a temporary illusion of growth. UW-Madison graduate Diquan Xian researched this distinction amongst developing countries in her senior honors thesis paper, “An Attempt to Understand Exchange Rate Misalignment and its Efects on Developing Countries.” By better understanding how it works, we can both understand how to prevent it in our own country and learn why
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