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Mean Reversion in Long-Horizon Real Exchange Rates: Evidence from Latin America

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  • Pablo Astorga

    (Latin American Centre, St. Antony's College, Oxford and Instituto Figuerola Universidad Carlos III, Marid, Spain.)

Abstract

This paper analyses stability in real multilateral exchange rates in six leading Latin-American economies during the XXth century using a new data set. A univariate approach is complemented by an error-correction model including key fundamentals. Unit-root testing shows a very slow process of mean reversion – if any – in the series in levels; however, mean reversion is found after allowing for trends and structural breaks with half-life values ranges from 0.8 to 2.5 years. We also found reversion to a conditional mean defined by the co-integrating relationship, and that the equilibrium path is largely explained by fundamentals - especially terms of trade and trade openness. Exchange rate policy proved to have only a transitory effect in generating real depreciation.

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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Oxford University Economic and Social History Series with number _080.

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Length: 32 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:nuf:esohwp:_080

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Web page: http://www.nuff.ox.ac.uk/economics/

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Keywords: Real Exchange Rates; Purchasing Power Parity; Economic Development; Latin America;

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Cited by:
  1. Paul A. David & S. Ryan Johansson & Andrea Pozzi, 2010. "The Demography of an Early Mortality Transition: Life Expectancy, Survival and Mortality Rates for Britain's Royals, 1500-1799," Oxford University Economic and Social History Series _083, Economics Group, Nuffield College, University of Oxford.
  2. Zhang, Zhibai, 2014. "Is there a rule of thumb for absolute purchasing power parity to hold?," MPRA Paper 55338, University Library of Munich, Germany.
  3. Alsayed, Hamad & McGroarty, Frank, 2012. "Arbitrage and the Law of One Price in the market for American depository receipts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1258-1276.

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