Modeling Real Exchange Rate Persistence in Chile

Peer Reviewed
7 July 2017

Leonardo Salazar

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.

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Publication reference
Salazar, L. (2017). Modeling Real Exchange Rate Persistence in Chile. Econometrics, 5(3), 29. doi:10.3390/econometrics5030029
Publication | 3 June 2020