Thursday, 17 March 2011: 17:40
The goal of this paper is to analyze the long-run equilibrium exchange rate in some Latin America and Asia countries using the monetary model described in Obstfeld and Rogoff (1996) and to evaluate the exchange rate gap between the regions. The model starts with the money demand equation, which is appended by the hypotheses of purchase power parity (PPP) and uncovered interest parity (UIP). After testing for the panel unit root, we use the Westerlund (2007) test to verify the existence of panel cointegration for the countries. As we observe the existence of a long-run relationship among GDP, money supply and exchange rate, we estimate the coefficients of the long-run exchange rate function using the dynamic OLS (DOLS) from a panel of 14 countries and quarterly observations that span from 1980 to 2009. The estimation shows the impact of monetary aggregates on the exchange rate and how large is the exchange rate gap between Latin America and Asia countries that might be causing a competitive distortion in the trade between the regions. For example, in order to track the equilibrium with Asia, the exchange rate in Brazil should be 8% more depreciated then its nominal value.
Keywords: exchange rate determination, monetary model, cointegration, panel.
JEL: F21, F31, C22, C23.