Determinants of Venezuela's Equilibrium Real Exchange Rate
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.Download Info
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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/74.Length: 31
Date of creation: 01 Mar 2006
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Handle: RePEc:imf:imfwpa:06/74
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Keywords: Real effective exchange rates; Oil prices; Exchange control measures;This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-05 (All new papers)
- NEP-ENE-2006-08-05 (Energy Economics)
- NEP-FMK-2006-08-05 (Financial Markets)
- NEP-IFN-2006-08-05 (International Finance)
References
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- Ronald Macdonald & Luca Antonio Ricci, 2004.
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- Paruolo, Paolo, 2002.
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Econometric Theory,
Cambridge University Press, vol. 18(03), pages 673-690, June.
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- 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.
- 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.
- Maurizio Michael Habib & Margarita Manolova Kalamova, 2007. "Are there oil currencies? The real exchange rate of oil exporting countries," Working Paper Series 839, European Central Bank.
- Jemma Dridi & Maher Hasan, 2008. "The Impact of Oil-Related Income on the Equilibrium Real Exchange Rate in Syria," IMF Working Papers 08/196, International Monetary Fund.
- Claudio Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 06/221, International Monetary Fund.
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