External imbalance, valuation adjustments and real Exchange rate: evidence of predictability in an emerging economy

Pablo Pincheira and Jorge Selaive ()

Revista de Analisis Economico – Economic Analysis Review, 2011, vol. 26, issue 1, 107-125

Abstract: In this paper we provide evidence of exchange rate predictability for a selected emerging market economy (EME) at intermediate horizons, arguably, the most relevant for policy purposes. This is important because the existing literature on exchange rate predictability has mainly focused on developed economies, leaving relatively unexplored the question for EME. By making use of a unique quarterly database of external assets and liabilities for Chile, we show that a measure of external imbalances is able to predict the real exchange rate over horizons of up to two years. Robust out-of-sample evidence on predictability reflects the fact that the external balance's importance to the exchange rate has risen in recent years and/or the precision of parameter estimates rises as sample size grows larger. When we break down our measure for external imbalances into its three component ratios (exports to imports, exports to assets, and assets to liabilities), we find that predictability is mainly driven by the last two. Our results suggest that researchers and policymakers should pay attention to external imbalances to understand the future dynamics of the real exchange rate.

Keywords: Real Exchange rate; net foreign assets; valuation adjustments; forecasting evaluation (search for similar items in EconPapers)
JEL-codes: F21 F31 F47 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.rae-ear.org/index.php/rae/article/view/340 (application/pdf)

Related works:
Working Paper: External Imbalances, Valuation Adjustments and Real Exchange Rate: Evidence of Predictability in an Emerging Economy (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ila:anaeco:v:26:y:2011:i:1:p:107-125

Ordering information: This journal article can be ordered from

Access Statistics for this article

Revista de Analisis Economico – Economic Analysis Review is currently edited by Carlos Ponce

More articles in Revista de Analisis Economico – Economic Analysis Review from Universidad Alberto Hurtado/School of Economics and Business Contact information at EDIRC.
Bibliographic data for series maintained by Mauricio Tejada ().