External Imbalances, Valuation Adjustments and Real Exchange Rate: Evidence of Predictability in an Emerging Economy

Economic Analysis Review, Vol. 26, No. 1, pp. 107-125, 2011

20 Pages Posted: 9 Feb 2012

See all articles by Pablo M. Pincheira

Pablo M. Pincheira

Adolfo Ibanez University - School of Business

Jorge Selaive

University of Chile - Business School

Date Written: June 28, 2011

Abstract

In this paper we provide evidence of exchange rate predictability for a selected emerging market economy (EME) at intermediate horizons, arguably, the most relevant for policy purposes. This is important because the existing literature on exchange rate predictability has mainly focused on developed economies, leaving relatively unexplored the question for EME. By making use of a unique quarterly database of external assets and liabilities for Chile, we show that a measure of external imbalances is able to predict the real exchange rate over horizons of up to two years. Robust out-of-sample evidence on predictability reflects the fact that the external balance’s importance to the exchange rate has risen in recent years and/or the precision of parameter estimates rises as sample size grows larger. When we break down our measure for external imbalances into its three component ratios (exports to imports, exports to assets, and assets to liabilities), we find that predictability is mainly driven by the last two. Our results suggest that researchers and policymakers should pay attention to external imbalances to understand the future dynamics of the real exchange rate.

Keywords: real exchange rate, net foreign assets, valuation adjustments

JEL Classification: F21, F31, F47

Suggested Citation

Pincheira, Pablo M. and Selaive, Jorge, External Imbalances, Valuation Adjustments and Real Exchange Rate: Evidence of Predictability in an Emerging Economy (June 28, 2011). Economic Analysis Review, Vol. 26, No. 1, pp. 107-125, 2011, Available at SSRN: https://ssrn.com/abstract=2001908

Pablo M. Pincheira (Contact Author)

Adolfo Ibanez University - School of Business ( email )

Diagonal Las Torres 2640
Peñalolén
Santiago
Chile

Jorge Selaive

University of Chile - Business School ( email )

Chile

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
28
Abstract Views
482
PlumX Metrics