Advanced Search
MyIDEAS: Login

Capital flows and long-term equilibrium real exchange rates in Chile

Contents:

Author Info

  • Elbadawi, Ibrahim A.
  • Soto, Raimundo

Abstract

In the context of an empirical model, the authors examine the impact of capital flows, among other fundamentals, on long-term exchange rates in Chile. The real exchange rate and its fundamentals were found to be cointegrated during 1960-92. This cointegration allows a reinterpretation of uni-equatorial estimates of the equilibrium real exchange rate (ERER) to be consistent with long-run forward-looking behavioral models. It also permits the estimation of an error-correction model capable of disentangling short-run from long-run shocks in observed movements of the ERER. The nonstationary nature of the fundamentals allows one to decompose innovations into permanent and transitory components - to get an empirical measure of the sustainability of the fundamental with which the ERER is determined. In general, the estimate of the cointegration of the ERER and its corresponding dynamic error-correction specification corroborates the theoretical model and produces fairly consistent results. The derived ERER index and the corresponding real exchange rate misalignment (for given sustainable values of the fundamentals) successfully reproduce the salient episodes in Chile's recent macroeconomic history. Capital flows are disaggregated into four components: 1) short-term capital flows; 2) long-term capital flows; 3) portfolio investment; and 4) foreign direct investment. As expected from economic theory, short-term capital flows and portfolio investment were found to have no effect on the ERER (although they can affect the real exchange rate in the short run). But long-term capital inflows and foreign direct investment have a significant appreciating effect on the ERER. To the extent that the recent inflow of capital to Chile is dominated by long-term capital flows that are judged to be sustainable, an important part of the ensuing appreciation of the real exchange rate is consistent with equilibrium behavior - reducing the need for counterbalancing exchange rate on macroeconomic policies.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1994/06/01/000009265_3970716141017/Rendered/PDF/multi0page.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1306.

as in new window
Length:
Date of creation: 30 Jun 1994
Date of revision:
Handle: RePEc:wbk:wbrwps:1306

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Email:
Web page: http://www.worldbank.org/
More information through EDIRC

Related research

Keywords: Economic Stabilization; Environmental Economics&Policies; Achieving Shared Growth; Economic Theory&Research; Macroeconomic Management;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
  2. Mankiw, N. Gregory & Campbell, John, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," Scholarly Articles 3207697, Harvard University Department of Economics.
  3. Rodriguez, Carlos Alfredo, 1989. "Macroeconomic policies for structural adjustment," Policy Research Working Paper Series 247, The World Bank.
  4. Obstfeld, Maurice, 1983. "Intertemporal price speculation and the optimal current-account deficit," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 135-145, August.
  5. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  6. Patricio Arrau & Jorge Quiroz & Rómulo Chumacero, 1992. "Ahorro Fiscal y Tipo de Cambio Real," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 29(88), pages 349-386.
  7. Schmidt-Hebbel, Klaus & Serven, Luis & DEC, 1994. "Dynamic response to external shocks in classical and Keynesian economies," Policy Research Working Paper Series 1300, The World Bank.
  8. Sebastian Edwards, 1986. "The Behavior of Interest Rates and Real Exchange Rates During a Liberalization Episode: The Case of Chile 1973-83," NBER Working Papers 1702, National Bureau of Economic Research, Inc.
  9. Mundlak, Yair & Cavallo, Domingo & Domenech, Roberto, 1989. "Agriculture and economic growth in Argentina, 1913-84:," Research reports 76, International Food Policy Research Institute (IFPRI).
  10. Corbo, Vittorio, 1985. "International Prices, Wages and Inflation in an Open Economy: A Chilean Model," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 564-73, November.
  11. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1306. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.