Real and Nominal Determinants of Real Exchange Rates in Latin America: Short-Run Dynamics and Long-Run Equilibrium

This paper analyzes the factors which determine the long-run real exchange rate in Argentina, Colombia and Mexico, distinguishing between real and nominal determinants. Cointegration analysis is utilized to establish that the real exchange rate has an equilibrium relationship with real variables (the terms of trade, capital flows, output, and government share of output) which excludes nominal varaibles (nominal exchange rate, money) and central bank intervention.