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An Estimate of the Real Exchange Rate for Costa Rica, BEER Approach. 2007-2022

Author

Listed:
  • Alonso Alfaro-Ureña

    (Economic Division, Central Bank of Costa Rica)

  • Manuel Esteban Sánchez-Gómez

    (Economic Division, Central Bank of Costa Rica)

  • Catalina Sandoval-Alvarado

    (Department of Economic Research, Central Bank of Costa Rica)

Abstract

This paper describes the methodology and results of estimating the equilibrium real exchange rate (ERER) using the reduced-form approach known as the Behavioral Equilibrium Exchange Rate (BEER). The real exchange rate (RER) equation is estimated with quarterly data in the period between I-2007 and IV-2022, which coincides with the adoption of exchange rate flexibility regimes in Costa Rica. The results indicate that the path of the ERER is explained by the evolution of its fundamentals: labor productivity, government expenditure, international investment position, terms of trade, and the difference among local and external interest rates. Improvements in labor productivity, increases in Government spending and increases in the spread of local and external interest rates are correlated with downward movements in the equilibrium path of the RER (real appreciations). On the other hand, the more negative result in the international investment position and a fall in terms of trade explains movements towards real depreciations. During the period of analysis, there is no evidence of RER deviations from its equilibrium level beyond the coherence zone determined. Therefore, variations on the ERER trajectory are consistent with the behavior of its fundamentals. ***Resumen: Este trabajo describe la metodología y los resultados de la estimación de la senda de equilibrio del tipo de cambio real (TCR) mediante el enfoque de forma reducida conocido como Behavioural Equilibrium Exchange Rate (BEER). La estimación se realiza con información trimestral para el periodo comprendido entre el primer trimestre del 2007 y el cuarto trimestre del 2022, luego del abandono de la paridad ajustable (minidevaluaciones) en octubre de 2006 y la adopción de regímenes cambiarios que buscaron brindar mayor flexibilidad en el mercado cambiario costarricense. Los resultados indican que la trayectoria de equilibrio del TCR está guiada por la evolución de la productividad laboral, el gasto del Gobierno, la posición de inversión internacional, los términos de intercambio y la diferencia de tasas de interés interna y externa. Mejoras en la productividad laboral, incrementos en el gasto del Gobierno y aumentos en la diferencia de tasas internas y externas se asocian con movimientos a la baja (apreciaciones reales) en la trayectoria de equilibrio del TCR. Por su parte, el deterioro en la posición en inversión internacional y la pérdida en términos de intercambio han contribuido a explicar los cambios al alza (depreciaciones reales). En el periodo de análisis no se identifican desvíos del TCR con respecto a su equilibrio más allá de su zona de coherencia. Por tanto, los cambios en la trayectoria del TCRE son coherentes con el comportamiento de sus determinantes fundamentales.

Suggested Citation

  • Alonso Alfaro-Ureña & Manuel Esteban Sánchez-Gómez & Catalina Sandoval-Alvarado, 2024. "An Estimate of the Real Exchange Rate for Costa Rica, BEER Approach. 2007-2022," Notas Técnicas 2402, Banco Central de Costa Rica.
    • Handle: RePEc:apk:nottec:2402
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    File URL: https://repositorioinvestigaciones.bccr.fi.cr/handle/20.500.12506/393
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    References listed on IDEAS

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • 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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