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Mean Reversion in Long-Horizon Real Exchange Rates: Evidence from Latin America

  • Pablo Astorga

    (Latin American Centre, St. Antony's College, Oxford and Instituto Figuerola Universidad Carlos III, Marid, Spain.)

This paper analyses stability in real multilateral exchange rates in six leading Latin-American economies during the XXth century using a new data set. A univariate approach is complemented by an error-correction model including key fundamentals. Unit-root testing shows a very slow process of mean reversion – if any – in the series in levels; however, mean reversion is found after allowing for trends and structural breaks with half-life values ranges from 0.8 to 2.5 years. We also found reversion to a conditional mean defined by the co-integrating relationship, and that the equilibrium path is largely explained by fundamentals - especially terms of trade and trade openness. Exchange rate policy proved to have only a transitory effect in generating real depreciation.

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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Oxford University Economic and Social History Series with number _080.

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Length: 32 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:nuf:esohwp:_080
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