Real misjudgment
Real misevaluation is a real exchange rate that is perceived as "wrong" according to certain criteria. Various exchange rate theories are criteria for a wrong valuation . If the real exchange rate deviates from the equilibrium exchange rate of the respective theory, one speaks of a real incorrect valuation. A distinction is made here between a real overvaluation and a real undervaluation.
species
A real overvaluation is an overvaluation of one currency against another measured in purchasing power units. A country whose price level is above the price level of another country is therefore considered to be overvalued in real terms. Real overvaluation occurs, for example, in an exchange rate regime with a fixed exchange rate if there is higher domestic inflation than in the country of the anchor currency .
The model of the purchasing power parity theory assumes that the exchange rate, provided that it is flexible, ensures that price levels are balanced in the long term. In reality, however, even with flexible exchange rates, considerable and permanent real mispricing can sometimes be observed. They occur when neither the exchange rate nor domestic or international prices compensate for the price level.
As a result of the greater price increase, if a real overvaluation occurs, the goods produced domestically are made more expensive and imported goods are cheaper (relative to this). Consumers are increasingly buying foreign products. Normally the currency would devalue (because consumers have to exchange local currency for foreign currency), but this path is blocked with fixed exchange rates. The consequence is a deterioration in the terms of trade , falling exports and recessive tendencies. It is therefore imperative that countries with fixed exchange rates keep their inflation low.
Exactly the opposite (positive for the country) effects has a real undervaluation .