Common and idiosyncratic movements in Latin-American exchange rates

We propose a simple theoretical and empirical approach to differentiate between common and idiosyncratic exchange rate movements in 5 Latin-American economies: Brazil, Chile, Colombia, Mexico, and Peru. Our approach allows us to distinguish the effects of a regional exchange rate common factor and m...

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Bibliographic Details
Published in:International economics (Paris) 2022-10, Vol.171, p.174-190
Main Authors: Gamboa-Estrada, Fredy, Romero, José Vicente
Format: Article
Language:English
Subjects:
Exchange rate
Exchange rate in Latin-American countries
Factor model
Forecasting and simulation
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Summary:We propose a simple theoretical and empirical approach to differentiate between common and idiosyncratic exchange rate movements in 5 Latin-American economies: Brazil, Chile, Colombia, Mexico, and Peru. Our approach allows us to distinguish the effects of a regional exchange rate common factor and macroeconomic fundamentals differentials on exchange rates. The methodology and estimation strategy are suitable for both low- and high-frequency settings. We provide evidence that the regional common factor is important to assess the dynamics of the Latin-American exchange rates. In our estimations, the relation between exchange rates and the common factor is contemporaneous and stable during the studied period.
ISSN:2110-7017
DOI:10.1016/j.inteco.2022.06.002