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Working Paper 187 - The Real Exchange Rate and External Competitiveness in Egypt, Morocco and Tunisia
A real exchange rate that is broadly aligned with its equilibrium value is an important part of a country’s macroeconomic framework. Persistently misaligned real exchange rates can cause a misallocation of resources between tradable and non-tradable sectors and negatively impact labor market dynamics. Reduced external competitiveness due to over-valued exchange rate hampers exports, aggregate demand, growth and job creation.2 Besides the longer-term implications, real exchange rate misalignment can lead to inflationary pressures and even trigger speculative attacks.3 When setting their exchange rate policy, countries also need to balance their goals of reaching competitiveness and macroeconomic stability (Dornbusch, 1980; Yagci, 2001).