The Empirical Regularities of the Real Exchange Rate in Chile: A Real Business Cycle Approach

Abstract

The paper formulates, solves, and calibrates a nonlinear stochastic dynamic competitive equilibrium model for Chile for the period ranging between the first quarter of 1977 and the fourth quarter of 1990. The framework used here incorporates both, elements from standard open economy models, and elements coming from the more recent literature on real business cycle models. It is found that within the competitive setting adopted here, a number of important empirical regularities exhibited by the real exchange rate can be closely replicated by the model. Among others, these include, the volatility of the real exchange rate, the correlation with the main export price, the correlation with real wages, and the correlation with foreign capital inflows. An important assumption needed to produce these results is that the country has, in general, been unable to fully smooth consumption by relying on the international credit market. On the other hand, the high serial autocorrelation exhibited by the real exchange rate, remains unexplained by the theoretical framework here adopted.