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Determinants of Venezuela'S Equilibrium Real Exchange Rate

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  • Juan Zalduendo
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    Abstract

    The Venezuelan Bolivar is pegged to the U.S. dollar and supported by foreign exchange restrictions. To assess the appropriateness of the peg during the current period of high oil export earnings and the likely consequences of a liberalization, this paper attempts to disentangle the effects of oil prices from other factors underlying the equilibrium real exchange rate, and examines the role of foreign exchange controls by extending the application of a vector error correction (VEC) model to parallel market exchange rates. Several findings are worth noting. First, oil prices have indeed played a significant role in determining a time-varying equilibrium real exchange rate path. Second, oil prices are not the only important determinant of the real effective exchange rate: declining productivity is also a key factor. Third, appreciation pressures are rising. Finally, the speed of convergence of a VEC model using parallel rather than official rates is higher, suggesting that the government has been able to maintain sharp deviations between the official and equilibrium rates because of Venezuela''s oil dependency and the concentration of oil income in government hands.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/74.

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    Length: 17
    Date of creation: 01 Mar 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/74

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    Keywords: Real effective exchange rates; Oil prices; Exchange control measures; exchange rate; real exchange rate; exchange rates; reer; market exchange rates; foreign exchange; effective exchange rates; export earnings; real effective exchange rate; exchange rate regimes; real exchange rates; equilibrium exchange rate; exchange controls; oil export; foreign exchange controls; effective exchange rate; history of exchange rate; multiple exchange rates; real exchange rate path; official exchange rate; exchange restrictions; exchange rate path; oil export earnings; foreign exchange restrictions; oil exports; exchange rate regime; market exchange rate; total export; export sectors; exchange rate level; floating exchange rate; floating exchange rate regime; exchange control; total exports; exchange rate misalignment; open economy macroeconomics; foreign exchange earnings; exchange reserves; exchange markets; exchange arrangements; exchange earnings; constant real exchange rate; exchange rate arrangements; exporting country; exchange rate movement; current exchange rate; foreign exchange reserves;

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    1. Ronald MacDonald & Luca Antonio Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers 03/44, International Monetary Fund.
    2. Paruolo, Paolo, 1997. "Asymptotic Inference on the Moving Average Impact Matrix in Cointegrated 1(1) VAR Systems," Econometric Theory, Cambridge University Press, vol. 13(01), pages 79-118, February.
    3. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper," IMF Working Papers 02/223, International Monetary Fund.
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    Cited by:
    1. Jemma Dridi & Maher Hasan, 2008. "The Impact of Oil-Related Incomeon the Equilibrium Real Exchange Rate in Syria," IMF Working Papers 08/196, International Monetary Fund.
    2. Zhang, Yue-Jun & Fan, Ying & Tsai, Hsien-Tang & Wei, Yi-Ming, 2008. "Spillover effect of US dollar exchange rate on oil prices," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 973-991.
    3. Korhonen, Iikka & Juurikkala, Tuuli, 2007. "Equilibrium exchange rates in oil-dependent countries," BOFIT Discussion Papers 8/2007, Bank of Finland, Institute for Economies in Transition.
    4. Hasanov Fakhri, 2011. "Analyzing price level in a booming economy: the case of Azerbaijan," EERC Working Paper Series 11/02e, EERC Research Network, Russia and CIS.
    5. Iikka Korhonen & Tuuli Juurikkala, 2009. "Equilibrium exchange rates in oil-exporting countries," Journal of Economics and Finance, Springer, vol. 33(1), pages 71-79, January.
    6. Claudio Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 06/221, International Monetary Fund.
    7. Hayat, Aziz & Ganiev, Bahodir & Tang, Xueli, 2013. "Expectations of future income and real exchange rate movements," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1274-1285.
    8. Habib, Maurizio Michael & Kalamova, Margarita Manolova, 2007. "Are there oil currencies? The real exchange rate of oil exporting countries," Working Paper Series 0839, European Central Bank.

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