Abstract:
This study estimates the long-run nominal equilibrium exchange rate (NEER) in Bolivia for the period 1990- 2024 using an innovative methodology that models it as an unobservable (latent) variable, grounded in purchasing power parity (PPP) theory and the hypothesis of cross-country productivity differentials. To this end, a state-space model estimated via the Kalman filter is employed. In addition, given the rigidity of fuel prices since 2005, a counterfactual NEER scenario is constructed under the assumption of a gradual adjustment of gasoline and diesel prices from that year onward, converging to international price levels by 2024. The results reveal a growing misalignment of the official exchange rate relative to its long-run equilibrium value since 2009, reflecting a progressive exchange rate revaluation in relation with the NEER. This dynamic helps explain the currency crisis of March 2023, in a context of deterioration in other macroeconomic fundamentals. For 2024, the estimated NEER is 37.2% higher than the official exchange rate, while under the counterfactual scenario the gap widens to 59.6%. Overall, the empirical strategy used to estimate the NEER provides a useful tool for analyzing exchange rate misalignments in economies operating under fixed or quasi-fixed exchange rate regimes.