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

Pablo Astorga ()

No _080, Oxford Economic and Social History Working Papers from University of Oxford, Department of Economics

Abstract: 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.

Keywords: Real exchange rates; Purchasing power; Parity; Economic development; Latin America (search for similar items in EconPapers)
JEL-codes: F41 N16 O11 (search for similar items in EconPapers)
Date: 2010-01-01
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