Mean reversion in long-horizon real exchange rates:
evidence from Latin America

Astorga Junquera, Pablo

doi:http://dx.doi.org/10.1016/j.jimonfin.2012.02.014

Mean reversion in long-horizon real exchange rates: evidence from Latin America

Citation

Astorga Junquera, P. Mean reversion in long-horizon real exchange rates: evidence from Latin America. J Int Money Finan. 2012 Oct;31(6):1529-50. DOI: 10.1016/j.jimonfin.2012.02.014

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.