Determinants of Venezuela’s Equilibrium Real Exchange Rate

IMF Working Papers, March 1, 2006

Source details

The Venezuelan Bolivar is pegged to the U.S. dollar and supported by foreign exchange restrictions.
Objective: assess the appropriateness of the peg during the period of high oil export earnings and evaluate likely consequences of a liberalization.
Approach: disentangle effects of oil prices from other factors underlying the equilibrium real exchange rate and examine the role of foreign exchange controls by extending the application of a vector error correction (VEC) model to parallel market exchange rates.

Econometric approach: vector error correction (VEC) model.
Extension: application of the VEC model to parallel market exchange rates in addition to official rates to capture effects of exchange controls.

Oil prices have played a significant role in determining a time-varying equilibrium real exchange rate path.
Oil prices are not the only important determinant of the real effective exchange rate: declining productivity is also a key factor.
Appreciation pressures are rising.
The speed of convergence of a VEC model using parallel rather than official rates is higher, suggesting that the government has been able to maintain sharp deviations between the official and equilibrium rates because of Venezuela's oil dependency and the concentration of oil income in government hands.

Source: IMF Working Paper "Determinants of Venezuela’s Equilibrium Real Exchange Rate" (Juan Zalduendo, March 1, 2006).