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Determinants of Venezuela’s Equilibrium Real Exchange Rate

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  • Mr. Juan Zalduendo

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.

Suggested Citation

  • Mr. Juan Zalduendo, 2006. "Determinants of Venezuela’s Equilibrium Real Exchange Rate," IMF Working Papers 2006/074, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2006/074
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    References listed on IDEAS

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    2. Coudert, Virginie & Couharde, Cécile & Mignon, Valérie, 2015. "On the impact of volatility on the real exchange rate – terms of trade nexus: Revisiting commodity currencies," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 110-127.
    3. Yang, Lu & Cai, Xiao Jing & Hamori, Shigeyuki, 2017. "Does the crude oil price influence the exchange rates of oil-importing and oil-exporting countries differently? A wavelet coherence analysis," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 536-547.
    4. Shang, Jin & Hamori, Shigeyuki, 2021. "Do crude oil prices and the sentiment index influence foreign exchange rates differently in oil-importing and oil-exporting countries? A dynamic connectedness analysis," Resources Policy, Elsevier, vol. 74(C).
    5. Chen, Hongtao & Liu, Li & Wang, Yudong & Zhu, Yingming, 2016. "Oil price shocks and U.S. dollar exchange rates," Energy, Elsevier, vol. 112(C), pages 1036-1048.
    6. Magali Dauvin, 2013. "Energy prices and the real exchange rate of commodity-exporting countries," EconomiX Working Papers 2013-33, University of Paris Nanterre, EconomiX.
    7. Omotosho, Babatunde S. & Wambai, Murjanatu, 2012. "Is the Naira-US Dollar Real Exchange Rate Misaligned?," MPRA Paper 98354, University Library of Munich, Germany.
    8. Hasanov, Fakhri, 2009. "Analyzing price level in a booming economy: the case of Azerbaijan," MPRA Paper 29555, University Library of Munich, Germany.
    9. Iikka Korhonen & Tuuli Juurikkala, 2009. "Equilibrium exchange rates in oil-exporting countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(1), pages 71-79, January.
    10. Adibeh Savari & Hassan Farazmand & Mehdi Basirat, 2014. "The Effect of Oil Income on Real Exchange Rate in Iranian Economy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(11), pages 1564-1572, November.
    11. Giannellis, Nikolaos & Koukouritakis, Minoas, 2013. "Exchange rate misalignment and inflation rate persistence: Evidence from Latin American countries," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 202-218.
    12. Tunaer Vural, Burçak Müge, 2019. "Determinants of Turkish real effective exchange rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 151-158.
    13. Mr. Claudio A Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 2006/221, International Monetary Fund.
    14. Mustafa Kocoglu & Phouphet Kyophilavong & Ashar Awan & So Young Lim, 2023. "Time-varying causality between oil price and exchange rate in five ASEAN economies," Economic Change and Restructuring, Springer, vol. 56(2), pages 1007-1031, April.
    15. Habib, Maurizio Michael & Kalamova, Margarita Manolova, 2007. "Are there oil currencies? The real exchange rate of oil exporting countries," Working Paper Series 839, European Central Bank.
    16. Mr. Jemma Dridi & Maher Hasan, 2008. "The Impact of Oil-Related Income on the Equilibrium Real Exchange Rate in Syria," IMF Working Papers 2008/196, International Monetary Fund.
    17. Pazouki, Azadeh & Zhu, Xiaoxian, 2022. "The dynamic impact among oil dependence volatility, the quality of political institutions, and government spending," Energy Economics, Elsevier, vol. 115(C).
    18. Alssadek, Marwan & Benhin, James, 2021. "Oil boom, exchange rate and sectoral output: An empirical analysis of Dutch disease in oil-rich countries," Resources Policy, Elsevier, vol. 74(C).
    19. Wang, Lu & Ruan, Hang & Hong, Yanran & Luo, Keyu, 2023. "Detecting the hidden asymmetric relationship between crude oil and the US dollar: A novel neural Granger causality method," Research in International Business and Finance, Elsevier, vol. 64(C).
    20. 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.

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