An Estimate of the Real Exchange Rate for Costa Rica, BEER Approach. 2007-2022

Alonso Alfaro-Ureña (), Manuel Esteban Sánchez-Gómez () and Catalina Sandoval-Alvarado ()
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Alonso Alfaro-Ureña: Economic Division, Central Bank of Costa Rica
Manuel Esteban Sánchez-Gómez: Economic Division, Central Bank of Costa Rica
Catalina Sandoval-Alvarado: Department of Economic Research, Central Bank of Costa Rica

No 2402, Notas Técnicas from Banco Central de Costa Rica

Abstract: This paper describes the methodology and results of estimating the equilibrium real exchange rate (ERER) using the reduced-form approach known as the Behavioral Equilibrium Exchange Rate (BEER). The real exchange rate (RER) equation is estimated with quarterly data in the period between I-2007 and IV-2022, which coincides with the adoption of exchange rate flexibility regimes in Costa Rica. The results indicate that the path of the ERER is explained by the evolution of its fundamentals: labor productivity, government expenditure, international investment position, terms of trade, and the difference among local and external interest rates. Improvements in labor productivity, increases in Government spending and increases in the spread of local and external interest rates are correlated with downward movements in the equilibrium path of the RER (real appreciations). On the other hand, the more negative result in the international investment position and a fall in terms of trade explains movements towards real depreciations. During the period of analysis, there is no evidence of RER deviations from its equilibrium level beyond the coherence zone determined. Therefore, variations on the ERER trajectory are consistent with the behavior of its fundamentals.

Keywords: Real Exchange Rate; Fundamental Determinants; Exchange Rate Flexibility (search for similar items in EconPapers)
JEL-codes: C32 F31 F33 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2024-02
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