Economics, Econometrics and Finance
8 years ago

Real factors drive Latin American exchange rates, leaving nominal variables behind.

The Journal of Development Studies
Real and nominal determinants of real exchange rates in Latin America: Short-run dynamics and long-run equilibrium
Joseph P. Joyce, Linda Kamas

Paper Summary

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The article looks at what determines the real exchange rate in Argentina, Colombia, and Mexico. It finds that real factors like terms of trade and productivity have a big impact on the real exchange rate, while nominal factors like the nominal exchange rate have a smaller effect. When nominal factors are considered, the nominal exchange rate becomes the main driver of changes in the real exchange rate. Shocks to nominal factors only have temporary effects on the real exchange rate.