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Real Equilibrium Exchange Rate in Colombia: Thousands of VEC Models Approach

Author

Listed:
  • Andrea Salazar-Díaz

    (Banco de la República (Colombia))

  • Aarón Levi Garavito-Acosta

    (Banco de la República (Colombia))

  • Sergio Restrepo Ángel

    (Banco de la República)

  • Leidy Viviana Arcila-Agudelo

    (Banco de la República (Colombia))

Abstract

Behavioral Equilibrium Exchange Rate (BEER) models propose a wide range of variables as potential drivers of equilibrium real exchange rates (ERER). This gives rise to model uncertainty issues due to the often drastic dependence and variability of ERER on a particular set of chosen variables. We address this issue by estimating thousands of Vector Error Correction (VEC) specifications using Colombian data spanning from the first quarter of 2000 to the fourth quarter of 2019. Based on an extensive literature review, we employ thirty-five proxies categorized among five fixed groups of economic fundamentals that underlie the ERER: Indebtedness, Fiscal sector, Productivity, Terms-of-Trade, and Interest Rate Differentials. Our approach derives an empirical distribution of ERER that allows us to determine with greater certainty, among hundreds of plausible economic specifications, whether the real exchange rate is misaligned or in equilibrium.

Suggested Citation

  • Andrea Salazar-Díaz & Aarón Levi Garavito-Acosta & Sergio Restrepo Ángel & Leidy Viviana Arcila-Agudelo, 2023. "Real Equilibrium Exchange Rate in Colombia: Thousands of VEC Models Approach," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 99, pages 33-78, July-Dece.
    • Handle: RePEc:lde:journl:y:2023:i:99:p:33-78
    DOI: 10.17533/udea.le.n99a352279
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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