Tipo de Cambio Real en Chile: Dinámica, Tendencia y Equilibrio

The Real Exchange Rate (RER) dynamic has been widely studied. The international literature shows that, in the period after the Bretton Woods treaties, it would follow a non-stationary process. The evidence for the Chilean economy suggests that only in the very long term it is possible to find evidence in favor of the PPP hypothesis. The main causes of these deviations from the law of a unique price would be short term nominal rigidities, transformations in the exchange rate regime and structural breaks in the real exchange rate. These deviations could impact the calculation of the equilibrium RER, and therefore the understanding of the RER dynamic becomes of particular relevance in terms of economic policy. This paper studies the RER dynamic, finding evidence of a potential structural break in its trajectory between the years 1998 and 1999. The cause of the break would be related to the implementation of the Flexible Exchange Rate Regime and Inflation Targeting. This finding supports the Quasi PPP hypothesis coined by Hegwood and Papell (1998), in which the RER would revert to a long term mean that is variable in time. Finally, through the resolution of a DSGE model estimated for Chile, we propose an alternative methodology for the calculation of the equilibrium RER.