Modeling the Chilean Peso against South American currencies

In the last decade, the Chilean peso has risen in value against both the Brazilian real and the Argentine peso. The increase versus Brazil has been a relatively constant climb while the exchange rate with Argentina held fairly stead, before increasing dramatically in the last two years. Using data from the International Monetary Fund’s database of International Financial Statistics, as well as information from each country’s central bank, I produce long-run models for Chile’s exchange rate with both Argentina and Brazil. The primary objective of the study is to determine the key factors in driving the relative price of the Chilean peso against the real and the Argentine peso, as well as the “cross effects” of Argentina and Brazil’s economies impacting Chile’s exchange rate with the other country. Each model relies on an autoregressive distributed lag (ARDL) process based on 12 years of quarterly observations. Preliminary findings show that both exchange rates depend on the gross domestic product (GDP) growth of both Chile and the foreign country, interest rates in each country, and prices of highly exported goods. Additionally, I find that economic growth in Brazil and increased trade between Chile and Brazil increases the value of the Chilean peso versus the Argentine peso. However, the opposite is not true as changes to the Argentine economy do not have significant impact on the exchange rate between Chile and Brazil. These findings have potentially significant policy implications, considering the relatively new administration in Brazil. This study suggests that increased trade between Chile and Brazil could drive up the value of the Chilean peso against other South American currencies, notably the Argentine peso.