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The Impact of Exchange Rate Regimes on Real Exchange Rates: ABC and Mexico in the 1990s


  • Nanno Mulder
  • Anne-Laure Baldi


This paper analyses the impact of exchange rate regimes on real exchange rates, as defined by the relative price of nontradables to tradables in Argentina, Brazil, Chile (ABC) and Mexico from 1990 to 2002. As identified by the empirical literature, the real exchange rate is determined in the long-run by the well-known Balassa-Samuelson effect, and in the medium and short run by government expenditure and terms of trade. Another, little discussed, explanatory factor that may cause real exchange rates to deviate from their trend is fixed exchange rate regimes. In countries that are international price-takers and adopt such a regime, exporters are forced to adjust their local price of tradables. This regime also affects the price of nontradables in countries with liberalised capital accounts, via portfolio inflows that increase demand for a “given†supply of nontradables in the short run. The econometric results of the paper confirm the impact of exchange rate regimes on relative prices in all countries except Chile which managed with flexibility the exchange rate and adopted capital controls. In the other three countries, relative prices deviated strongly from their trends due to the fixed regimes. In turn this caused the share of the nontradable sector to increase disproportionally relative to the tradable sector.

Suggested Citation

  • Nanno Mulder & Anne-Laure Baldi, 2004. "The Impact of Exchange Rate Regimes on Real Exchange Rates: ABC and Mexico in the 1990s," Econometric Society 2004 Latin American Meetings 45, Econometric Society.
  • Handle: RePEc:ecm:latm04:45

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    References listed on IDEAS

    1. Asea, Patrick K & Corden, W Max, 1994. "The Balassa-Samuelson Model: An Overview," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 191-200, October.
    2. Takatoshi Ito & Peter Isard & Steven Symansky, 1999. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Chapters,in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 109-132 National Bureau of Economic Research, Inc.
    3. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
    4. Romain Duval, 2001. "Taux de change reel et effet Balassa-Samuelson," Economie Internationale, CEPII research center, issue 85, pages 101-128.
    5. Motonishi, Taizo, 2002. "Modifications of the Balassa-Samuelson Model: The Effects of Balanced Growth and Capital Accumulation," Journal of the Japanese and International Economies, Elsevier, vol. 16(1), pages 31-49, March.
    6. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 111-155.
    7. Prema-Chandra Athukorala & Sarath Rajapatirana, 2003. "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," The World Economy, Wiley Blackwell, vol. 26(4), pages 613-637, April.
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    9. Strauss, Jack, 1999. "Productivity differentials, the relative price of non-tradables and real exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(3), pages 383-409.
    10. Patrick K. Asea, 1994. "The Balassa-Samuelson Model: An Overview," UCLA Economics Working Papers 710, UCLA Department of Economics.
    11. Kenneth Rogoff, 1992. "Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 10(2), pages 1-29, November.
    12. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    13. C. Allard-Prigent & H. Guilmeau & A. Quinet, 2000. "The real exchange rate as the relative price of nontradables in terms of tradables: theoretical investigation and empirical study on French data," Documents de Travail de la DESE - Working Papers of the DESE g2000-02, Institut National de la Statistique et des Etudes Economiques, DESE.
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    More about this item


    Real exchange rates; determinants; Exchange rate regimes; Latin America;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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