The REER is essentially a measure of a country's currency value compared to other currencies, adjusted for inflation. It’s a critical indicator of how competitive a country's goods and services are in the global market. When the REER is “misaligned,” it means the currency is either overvalued or undervalued compared to its true worth.In simpler terms, if a currency is overvalued, the country's goods and services become more expensive for other countries to buy, which can hurt exports. On the flip side, if it's undervalued, it makes exports cheaper and more attractive to foreign buyers.

This study looked at data from 1990 to 2021 to see if the REER of Eswatini, Lesotho, and Namibia was misaligned. Using advanced statistical methods (like DOLS and FMOLS, which help handle complex data), the researchers discovered that the REER was slightly overvalued by about 2%. While this might not seem like much, even a small overvaluation can have a noticeable impact on an economy, particularly for countries that rely heavily on imports.
 
Next, the study examined how this misalignment affects key economic factors like GDP and exports using a method called Bayesian Vector Autoregressive (BVAR) modeling. The results were interesting:
 
GDP: The study found that REER misalignment had little to no direct impact on GDP fluctuations. This suggests that other factors, such as government spending, investment, or external economic conditions, are more influential in driving GDP changes in these countries. Exports: However, when it comes to exports, the misalignment does matter. A shock or sudden change in the REER had a more immediate and significant impact on exports, making them less competitive. This indicates that while the broader economy might not be immediately affected, the export sector, which is crucial for these countries, does feel the pressure.

For policymakers, understanding these dynamics is crucial. Misalignment in the exchange rate can lead to economic instability, affecting everything from investment decisions to trade balances. If the REER is not properly aligned, it could distort the economy and make it harder for these countries to compete globally. Policymakers in Eswatini, Lesotho, and Namibia need to carefully monitor their REER and consider the implications of any misalignment. By doing so, they can better manage their economies, promote stability, and ensure that their countries remain competitive in the global market.
In summary, this study sheds light on the importance of exchange rate alignment for smaller, open economies. While the immediate effects might not be visible in GDP, the long-term impact on exports and economic stability cannot be overlooked. For countries in the CMA, keeping an eye on the REER is not just important—it’s essential for sustainable economic growth.