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This thesis studies the equilibrium real effective exchange rates and the degree of misalignment of currencies. It focuses on the real effective exchange rates of Icelandic króna and Chinese renminbi, with special attention paid to the evolution of these exchange rates in the period of crisis. It identifies key factors influencing the real effective exchange rates of króna and renminbi, calculates their equilibrium level and confirms that these currencies were misaligned in the pre-crisis period. It stresses the impact of real interest rate differential in the case of króna and of sterilization operations applied by the People's Bank of China in the case of renminbi. It further examines whether the relationship between real exchange rates and economic fundamentals was distorted in the crisis. Finally, the thesis provides an insight into whether the crisis led to narrowing the degree of misalignment of renminbi and króna.

This study has analysed the misalignment of the real exchange rates of the eleven original euro members at the introduction of the euro, and their consequences for inflation in the first five and ten years of the monetary union. Using four separate models of real equilibrium exchange rates, the largest overvaluations are found for Portugal and Germany, and the largest undervaluations are found for Ireland and Finland. In accordance with theory, adjustment towards equilibrium through inflation rate differentials seems to have occurred: the effect being clear with regard to two of the models, and ambiguous according to the two remaining. The study sheds light on the appropriateness of the conversion rates at the introduction of the euro in 1999, and the macroeconomic consequences of real exchange rate misalignment.