Mean reversion in long-horizon real exchange rates: Evidence from Latin America
AbstractThis paper examines mean reversion in real effective exchange rates in six leading Latin American economies during the XXth century using a new data set. A unit-root approach is complemented by an error-correction model including key fundamentals such as terms of trade, trade openness and relative productivities. Unit-root testing shows a very slow process of reversion – if any – to a constant mean in the original series, rejecting the strict PPP hypothesis; however, mean reversion is found after allowing for trends and structural breaks with a half-life average of 1½ years for the six countries. We also found reversion to a conditional mean defined by the co-integrating relationship with an average half-life of 2½ years. Our estimates, although lower than the 3–5 year range that motivated the Rogoff’s puzzle, still indicate the presence of important obstacles to the adjustment process that need further investigation.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 31 (2012)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/inca/30443
Real exchange rates; Purchasing power parity; Mean reversion; Economic development; Latin America;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F31 - International Economics - - International Finance - - - Foreign Exchange
- N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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