Implicit value of the currency and real exchange rate in Latin America

The experts consider that the closer the implicit value of a currency is to its real exchange rate, the greater is the backing of that currency in dollars and vice versa, it is to say that the greater the real exchange rate of a currency  with respect to its implied value is, lower is its dollar backing.

The implicit value of a currency is the result (quotient) of dividing the monetary liquidity M2 between the International Reserves. This figure is used as an ideal unit of measure to establish the exchange rate of a country with respect to the standard currency, the United States dollar.

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Of the seven Latin American countries analyzed in this paper, Argentina is the nation whose implicit value of the currency of 17.60 pesos per dollar is closer to its official exchange rate of 17.65 pesos per dollar.

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Brazil, the largest country in Latin America had an exchange rate of 3.29 Reais per dollar for the month of June 2017, while the implied value of its currency was 0.70 against the dollar.

Colombia, on the other hand, presents the most remote figure between the implicit value of its currency of 8.73 pesos per dollar and its official exchange rate of 2,994 pesos per dollar.

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The implicit value of the currency in Chile is 274.56 pesos per dollar but its official official exchange rate for July 2017 was 650.17 pesos per dollar, slightly more than double of its implicit value.

In Mexico, the official exchange rate of 17.91 pesos per dollar was practically twice its implicit value of 7.90 pesos per dollar for the month of July 2017.

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In Peru the average official exchange rate for July 2017 was 3.24 Soles per dollar while the implied value of its currency against the dollar was 9.90 soles per dollar.

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In Venezuela, the situation is different from the other countries mentioned here, since there are two official exchange rates and an uncontrolled free system of a speculative nature, which, however, governs most of the economy's operations.

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Conclusion

The thesis of those who maintain that the closer the implicit value of a currency to its official rate of change the stronger the economy is does not correspond exactly to reality because it denies the essential principle in which bases the financial and insurance system, which considers that only a limited portion of the market demands daily foreign exchange and only a limited portion of the insured demand daily coverage of claims. A broad explanation of this thesis can be seen by the reader in the following link:

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http://pablorafaelgonzalez.blogspot.com/2014/07/a-different-idea-for-calculating.html

The reality also shows that in countries like Colombia that have a great differential between the implicit value of their currency and their real exchange rate the phenomenon of inflation is under control. This fact would reveals that the big difference between the real exchange rate and the implicit value of the currency is not determinant cause of inflation.

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