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In implementing macroeconomic policy countries can no longer ignore the external sector. There is, in fact, a growing recognition that the real exchange rate is one of the most important macroeconomic variables. Its evolution greatly affects both the payments position and the international competitiveness of a country. Moreover, when the real exchange rate deviates from its long-run, sustainable equilibrium level-that is, where there is a real exchange rate misalignment-severe macroeconomic disequilibriums usually result

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