Misalignment of currencies

Exchange rate misalignment
Overvalued currencies
Undervalued currencies
Misvalued currencies
Currency overvaluations and undervaluations have appeared repeatedly under the postwar regimes of both fixed and flexible exchange rates; have tended to grow rather than diminish; and may well reappear periodically even if the current regime is substantially reformed. Floating exchange rates tend to be accompanied by massive capital flows, resulting in large currency misalignments. These produce new protectionist measures in countries with overvalued currencies. In contrast to the initial assumptions of the Bretton Woods system, monetary flows have now come to determine trade flows rather than vice versa, and thus a country can find itself with a currency whose value in no way reflects its ability to compete in international trade, thus further exacerbating the uncertainty in the trading system and adding to the pressures for further protection.
An ongoing policy issue of considerable importance is how best to address such imbalances. There has been resort to, and proposals for, such measures as direct intervention in the foreign exchange markets, trade controls, border taxes, capital controls, interest equalization taxes, 'compensatory finance', and a range of other 'second-best' devices, as well as simply 'living with' the disequilibria.
(F) Fuzzy exceptional problems