Chapter

The Equilibrium Real Exchange Rate: Theory and Evidence for Latin America

Michael Connolly and John Devereux

in Fundamental Determinants of Exchange Rates

Published in print April 1998 | ISBN: 9780198293064
Published online November 2003 | e-ISBN: 9780191596940 | DOI: http://dx.doi.org/10.1093/0198293062.003.0005
 The Equilibrium Real Exchange Rate: Theory and Evidence for Latin America

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Our empirical results suggest that movements in the equilibrium real exchange rate NATREX for Latin American economies over the period 1960–85 can be explained in terms of growth, openness, and government spending, and the external terms of trade. Technical advances and increases in the capital stock tend to appreciate the real exchange rate, as does liberalization by increasing openness. Government expenditures also tend to appreciate the real exchange rate by falling primarily on non‐traded goods. As with the NATREX in the other chapters, we abstract from short‐run monetary and fiscal factors that cause temporary deviations in the short‐run real exchange rate from its natural equilibrium level.

Keywords: Latin American external terms of trade; Latin American government spending; Latin American growth; Latin American openness‐ liberalization of economies; Latin American real exchange rates; technical advance

Chapter.  10083 words. 

Subjects: Macroeconomics and Monetary Economics

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