Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/339059 
Year of Publication: 
2025
Series/Report no.: 
Development Research Working Paper Series No. 13/2025
Publisher: 
Institute for Advanced Development Studies (INESAD), La Paz
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.
Subjects: 
nominal equilibrium (or shadow) exchange rate
fixed or quasi-fixed exchange rate regime
state-space model
Kalman filter
JEL: 
C32
E37
E59
F31
F41
Document Type: 
Working Paper

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