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

  • Pablo Astorga

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 University of Oxford, Department of Economics in its series Economics Series Working Papers with number Number 80.

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Date of creation: 01 Jan 2010
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Handle: RePEc:oxf:wpaper:number-80
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  18. Pablo Astorga, 2007. "Real Exchange Rates in Latin America: what does the 20th Century reveal?," Working Papers in Economic History wp07-03, Universidad Carlos III, Instituto Figuerola de Historia y Ciencias Sociales.
  19. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
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