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Long Run Determinants of Real Exchange Rates in Latin America

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  • Jorge Carrera

    (Universidad Nacional de la Plata - Universidad Nacional de la Plata)

  • Romain Restout

    ()
    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

Abstract

This paper investigates the long run behavior of real exchange rates in nineteen countries of Latin America over the period 1970 - 2006. Our data does not support the Purchasing Power Parity (PPP) hypothesis, implying that real shocks tend to have permanent effects on Latin America's real exchange rates. By exploiting the advantage of non stationary panel econometrics, we are able to determinate factors that drive real exchanges rate in the long run : the Balassa-Samuelson effect, government spending, the terms of trade, the openness degree, foreign capital flows and the de facto nominal exchange regime. The latter effect has policy implications since we find that a fixed regime tends to appreciate the real exchange rate. This finding shows the non neutrality of exchange rate regime regarding its effects on real exchange rates. We also run estimations for country subgroups (South America versus Caribbean and Central America). Regional results highlight that several real exchange rates determinants are specific to one geographic zone. Finally, we compute equilibrium real exchange rate estimations. Two main results are derived from the investigation of misalignments, [i ] eight real exchange rates are quite close to their equilibrium level in 2006, and [ii ] our model shows that a part of currencies crises that arose in Latin America was preceded by a real exchange rate overvaluation.

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Date of creation: 2008
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Handle: RePEc:hal:journl:halshs-00276402

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Keywords: equilibrium real exchange rate ; panel cointegration. ; panel unit roots;

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Cited by:
  1. Guzin BAYAR & Selman TOKPUNAR, 2013. "Turk Lirasi Reel Kuru Denge Degerinde Mi?," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 13(4), pages 405-426.
  2. Khaled CHNAINA & Farid MAKHLOUF, 2012. "Impact des transferts de fonds sur le taux de change réel effectif en Tunisie," Working Papers 2011-2012_4, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Jan 2012.
  3. Timothy Falcon Crack & Olivier Ledoit, 2010. "Central limit theorems when data are dependent: addressing the pedagogical gaps," IEW - Working Papers 480, Institute for Empirical Research in Economics - University of Zurich.
  4. Diego Bastourre & Jorge Carrera & Javier Ibarlucia, 2007. "Commodity Prices In Argentina: What Does Move The Wind?," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 076, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  5. Diego Bastourre & Jorge Carrera & Javier Ibarlucia, 2008. "Commodity Prices in Argentina: What Moves the Wind?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(51), pages 43-81, April - S.
  6. Al-mulali, Usama & Che Sab, Normee, 2009. "The Impact of Oil Prices on the Real Exchange Rate of the Dirham: a Case Study of the United Arab Emirates," MPRA Paper 23493, University Library of Munich, Germany.
  7. Lee, Chin & Law, Chee-Hong, 2013. "The Effects of Trade Openness on Malaysian Exchange Rate," MPRA Paper 45185, University Library of Munich, Germany.

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