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The Impact of Exchange Rate Regimes on Real Exchange Rates: ABC and Mexico in the 1990s

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  • Nanno Mulder
  • Anne-Laure Baldi

Abstract

This paper analyses the impact of exchange rate regimes on real exchange rates, as defined by the relative price of nontradables to tradables in Argentina, Brazil, Chile (ABC) and Mexico from 1990 to 2002. As identified by the empirical literature, the real exchange rate is determined in the long-run by the well-known Balassa-Samuelson effect, and in the medium and short run by government expenditure and terms of trade. Another, little discussed, explanatory factor that may cause real exchange rates to deviate from their trend is fixed exchange rate regimes. In countries that are international price-takers and adopt such a regime, exporters are forced to adjust their local price of tradables. This regime also affects the price of nontradables in countries with liberalised capital accounts, via portfolio inflows that increase demand for a “given†supply of nontradables in the short run. The econometric results of the paper confirm the impact of exchange rate regimes on relative prices in all countries except Chile which managed with flexibility the exchange rate and adopted capital controls. In the other three countries, relative prices deviated strongly from their trends due to the fixed regimes. In turn this caused the share of the nontradable sector to increase disproportionally relative to the tradable sector.

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File URL: http://repec.org/esLATM04/up.24493.1080551694.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 45.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:45

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Keywords: Real exchange rates; determinants; Exchange rate regimes; Latin America;

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  1. Irving B. Kravis & Robert E. Lipsey, 1982. "Towards an Explanation of National Price Levels," NBER Working Papers 1034, National Bureau of Economic Research, Inc.
  2. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," NBER Working Papers 9219, National Bureau of Economic Research, Inc.
  3. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1996. "Relative Labour Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," CEPR Discussion Papers 1464, C.E.P.R. Discussion Papers.
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  13. C. Allard-Prigent & H. Guilmeau & A. Quinet, 2000. "The real exchange rate as the relative price of nontradables in terms of tradables: theoretical investigation and empirical study on French data," Documents de Travail de la DESE - Working Papers of the DESE g2000-02, Institut National de la Statistique et des Etudes Economiques, DESE.
  14. Takatoshi Ito & Peter Isard & Steven Symansky, 1999. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 109-132 National Bureau of Economic Research, Inc.
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