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Determinants of Venezuela’s Equilibrium Real Exchange Rate

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  • Juan Zalduendo

Abstract

The Venezuelan Bolivar is pegged to the U.S. dollar and supported by foreign exchange restrictions. To assess the appropriateness of the peg during the current period of high oil export earnings and the likely consequences of a liberalization, this paper attempts to disentangle the effects of oil prices from other factors underlying the equilibrium real exchange rate, and examines the role of foreign exchange controls by extending the application of a vector error correction (VEC) model to parallel market exchange rates. Several findings are worth noting. First, oil prices have indeed played a significant role in determining a time-varying equilibrium real exchange rate path. Second, oil prices are not the only important determinant of the real effective exchange rate: declining productivity is also a key factor. Third, appreciation pressures are rising. Finally, the speed of convergence of a VEC model using parallel rather than official rates is higher, suggesting that the government has been able to maintain sharp deviations between the official and equilibrium rates because of Venezuela's oil dependency and the concentration of oil income in government hands.

Suggested Citation

  • Juan Zalduendo, 2006. "Determinants of Venezuela’s Equilibrium Real Exchange Rate," IMF Working Papers 06/74, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/74
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    References listed on IDEAS

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    1. Paruolo, Paolo, 2002. "Asymptotic Inference On The Moving Average Impact Matrix In Cointegrated I (2) Var Systems," Econometric Theory, Cambridge University Press, vol. 18(03), pages 673-690, June.
    2. Ronald Macdonald & Luca Antonio Ricci, 2004. "Estimation Of The Equilibrium Real Exchange Rate For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 282-304, June.
    3. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper; In Search of Commodity Currencies," IMF Working Papers 02/223, International Monetary Fund.
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    Cited by:

    1. Hayat, Aziz & Ganiev, Bahodir & Tang, Xueli, 2013. "Expectations of future income and real exchange rate movements," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1274-1285.
    2. Coudert, Virginie & Couharde, Cécile & Mignon, Valérie, 2015. "On the impact of volatility on the real exchange rate – terms of trade nexus: Revisiting commodity currencies," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 110-127.
    3. Adibeh Savari & Hassan Farazmand & Mehdi Basirat, 2014. "The Effect of Oil Income on Real Exchange Rate in Iranian Economy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(11), pages 1564-1572, November.
    4. Giannellis, Nikolaos & Koukouritakis, Minoas, 2013. "Exchange rate misalignment and inflation rate persistence: Evidence from Latin American countries," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 202-218.
    5. Jemma Dridi & Maher Hasan, 2008. "The Impact of Oil-Related Income on the Equilibrium Real Exchange Rate in Syria," IMF Working Papers 08/196, International Monetary Fund.
    6. repec:eee:reveco:v:49:y:2017:i:c:p:536-547 is not listed on IDEAS
    7. Hasanov, Fakhri, 2009. "Analyzing price level in a booming economy: the case of Azerbaijan," MPRA Paper 29555, University Library of Munich, Germany.
    8. Chen, Hongtao & Liu, Li & Wang, Yudong & Zhu, Yingming, 2016. "Oil price shocks and U.S. dollar exchange rates," Energy, Elsevier, vol. 112(C), pages 1036-1048.
    9. Habib, Maurizio Michael & Kalamova, Margarita Manolova, 2007. "Are there oil currencies? The real exchange rate of oil exporting countries," Working Paper Series 839, European Central Bank.
    10. Iikka Korhonen & Tuuli Juurikkala, 2009. "Equilibrium exchange rates in oil-exporting countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(1), pages 71-79, January.
    11. Magali Dauvin, 2014. "Energy prices and the real exchange rate of commodity-exporting countries," International Economics, CEPII research center, issue 137, pages 52-72.
    12. Claudio A Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 06/221, International Monetary Fund.
    13. Zhang, Yue-Jun & Fan, Ying & Tsai, Hsien-Tang & Wei, Yi-Ming, 2008. "Spillover effect of US dollar exchange rate on oil prices," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 973-991.

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