Mean reversion in long-horizon real exchange rates: Evidence from Latin America |
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Authors: | Pablo Astorga |
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Institution: | Institut Barcelona de Estudis Internacionals (IBEI), Elisabets 10, 08001 Barcelona, Spain |
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Abstract: | This paper examines mean reversion in real effective exchange rates in six leading Latin American economies during the XXth century using a new data set. A unit-root approach is complemented by an error-correction model including key fundamentals such as terms of trade, trade openness and relative productivities. Unit-root testing shows a very slow process of reversion – if any – to a constant mean in the original series, rejecting the strict PPP hypothesis; however, mean reversion is found after allowing for trends and structural breaks with a half-life average of 1½ years for the six countries. We also found reversion to a conditional mean defined by the co-integrating relationship with an average half-life of 2½ years. Our estimates, although lower than the 3–5 year range that motivated the Rogoff’s puzzle, still indicate the presence of important obstacles to the adjustment process that need further investigation. |
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Keywords: | F41 F31 N16 O11 |
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