Real Equilibrium Exchange Rate in Colombia: Thousands of VEC Models Approach

Andrea Salazar-Díaz, Aaron Garavito, Sergio Restrepo-Ángel and Leidy Viviana Arcila-Agudelo
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Andrea Salazar-Díaz: Banco de la República (Colombia)
Leidy Viviana Arcila-Agudelo: Banco de la República (Colombia)

Lecturas de Economía, 2023, issue 99, 33-78

Abstract: Behavioral Equilibrium Exchange Rate (BEER) models propose a wide range of variables as potential drivers of equilibrium real exchange rates (ERER). This gives rise to model uncertainty issues due to the often drastic dependence and variability of ERER on a particular set of chosen variables. We address this issue by estimating thousands of Vector Error Correction (VEC) specifications using Colombian data spanning from the first quarter of 2000 to the fourth quarter of 2019. Based on an extensive literature review, we employ thirty-five proxies categorized among five fixed groups of economic fundamentals that underlie the ERER: Indebtedness, Fiscal sector, Productivity, Terms-of-Trade, and Interest Rate Differentials. Our approach derives an empirical distribution of ERER that allows us to determine with greater certainty, among hundreds of plausible economic specifications, whether the real exchange rate is misaligned or in equilibrium.

Keywords: real exchange rate; VEC; productivity; BEER; terms of trade (search for similar items in EconPapers)
JEL-codes: C32 F31 F32 F41 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Real Equilibrium Exchange Rate in Colombia: Thousands of VEC Models Approach (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:lde:journl:y:2023:i:99:p:33-78

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DOI: 10.17533/udea.le.n99a352279

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