Arnoldshain Seminar XV
“The EU and Latin America Facing Globalization”
September 4 – 6, 2017

Zarzosa Valdivia, Fernando, Universidad Nacional de Córdoba, The role of Fundamentals on the Persistence of Real Exchange Rate Misalignments in Argentina, Brazil, Chile, Mexico and Venezuela.
This research analyses the behaviour of misalignments of the structural real exchange rate (relative tradable to non-tradable prices) and PPP real exchange rate (relative foreign to domestic prices adjusted by the nominal exchange rate) for Argentina, Brazil, Chile, Mexico and Venezuela. Misalignments are measured by the difference between the equilibrium and the observed real exchange rate. Long-run values are measured by the Hodrick and Prescott filter or estimated by applying cointegration methods; the latter considers the effect of fundamentals on real exchange rates. The persistence of real exchange misalignments is determined by the application of autoregressive model of order p, AR(p), and the estimation of their corresponding impulse response function. When equilibrium levels are calculated in terms of the HP filter (fundamentals), structural and PPP real exchange rate misalignments exhibit an overshooting behaviour (monotonous, but not linear, adjustment), a pattern showing an up and down movement. The months in which the misalignment disappears after a shock has hit the economy varies between 10 and 17 (12 to 15) months for Hodrick and Prescott (fundamentals) based real exchange rate misalignments. The response of the real exchange rate to productivity, investment, terms of trade, total labour force and debt service shocks varies between real exchange rate concepts and between countries. In all cases, however, 50% of the misalignment after a temporary shock has hit the economy disappears after six months.