Determinants of the Real Equilibrium Exchange Rate in Peru: Is the Sol a Commodity Currency?

This paper tests the hypothesis of "commodity currency" on the sol and, more generally, identifies the drivers of Peru's equilibrium real exchange rate using a cointegration analysis. The results show that export commodity prices do not have a statistically significant impact on Peru's real effective exchange rate, suggesting that the sol is not a commodity currency. The paper provides empirical evidence that large profit repatriation and foreign exchange intervention have effectively insulated Peru's real exchange rate from the impact of commodity price shocks. Peru's equilibrium real exchange rate is found to be driven mostly by productivity and government consumption. (Audio: Department of Economic Publications)