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Modeling Real Exchange Rate Persistence in Chile

Leonardo Salazar ()
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Leonardo Salazar: Department of Economics and Finance, Universtiy of Bío-Bío, Avenida Collao 1202, Concepción, Chile

Econometrics, 2017, vol. 5, issue 3, 1-21

Abstract: The long and persistent swings in the real exchange rate have for a long time puzzled economists. Recent models built on imperfect knowledge economics seem to provide a theoretical explanation for this persistence. Empirical results, based on a cointegrated vector autoregressive (CVAR) model, provide evidence of error-increasing behavior in prices and interest rates, which is consistent with the persistence observed in the data. The movements in the real exchange rate are compensated by movements in the interest rate spread, which restores the equilibrium in the product market when the real exchange rate moves away from its long-run benchmark value. Fluctuations in the copper price also explain the deviations of the real exchange rate from its long-run equilibrium value.

Keywords: exchange rate; long swings; I(2) analysis (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2017
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