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Fundamental Determinants of Exchange Rates$
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Jerome L. Stein and Polly Reynolds Allen

Print publication date: 1998

Print ISBN-13: 9780198293064

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198293062.001.0001

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

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

(p.154) 5 The Equilibrium Real Exchange Rate: Theory and Evidence for Latin America
Fundamental Determinants of Exchange Rates

Michael Connolly

John Devereux

Oxford University Press

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

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