Tracking Exchange Rate Management in Latin America

Abstract

The exchange rate is one of the most important prices in any open economy. Tracking deviations from its long-run value may provide important information for policymakers. One way to track such deviations is to examine numerical patterns in exchange rates to see if the patterns appear to have been subject to some degree of policy management. Following this approach, we use Benford’s Law as our base case for free-floating exchange rates. Benford’s Law argues that the frequence of the appearance of numerals finds 1’s more frequent, than 2’s, than 3’s, etc., and this established statistical patterns has been verified and used in research tests in many scientific fields. We apply our forensic approach to exchange rates, computing the distribution of exchange-rate observed values and comparing them with those of Benford’s Law. We document such cases for 15 Latin American countries. Latin American countries are small open economies that are characterized for having different degrees of dollarization and intervention in the forex market, primary based on US dollar transactions. This is an alternative view of how these characteristics play a role with respect to an implied equilibrium exchange rate.