relative to Brazil may be a weak proxy for tradables-to-nontradables productivity and thus poorly capture the Balassa-Samuelson effect.

To test the robustness of the set of fundamentals identified as driving the peso’s equilibrium exchange rate, we repeat the analysis using annual data for 1980-2014, in which we include alternative measures of our fundamental variables (see detailed description in Appendix Table A.1). In particular, we use Argentina’s terms of trade<sup>39</sup> index (exports-to-imports price ratio available quarterly), improved measures of productivity differentials to better capture the Balassa Samuelson effect, and reserves and trade openness measured as a percent of GDP. We find that our choice of fundamentals is robust to estimation at annual frequency. We obtain a single cointegrating relation in which coefficients are significant and have the predicted signs (Table A.10 columns 1 and 3). The estimated cointegration equation for our new preferred specification can be written as: Terms of trade improvements (wealth effect), increases in labor productivity of agriculture relative to the service sector vis-à-vis main trading partners excluding China (Balassa-Samuelson effect), rising reserves, and decreased trade (e.g., tighter trade restrictions), all appreciate the real exchange rate. The speed of adjustment coefficients (error correction) yield half-lives of approximately 2 and 5 years in the specifications using the REER and inflation-adjusted REER, respectively, in line with the empirical literature.

According to the estimated long-run relationship using the inflation-adjusted REER, the peso was overvalued from the mid-90s until the devaluation in 2002, and undervalued thereafter until 2010, after which an overvaluation has re-emerged. In 2014, the estimated cointegration relations suggest the peso was overvalued by 15% according to inflation-adjusted REER, contrasting the 7% undervaluation measured according to the unadjusted REER. Thus, we find a large discrepancy between the two measures of the REER.

Residual testing shows signs of possible misspecification: we fail to reject zero autocorrelation of residuals but find evidence of non-normality<sup>40</sup> and heteroskedasticity for some specifications. As a result, we employ alternative methodologies such as dynamic OLS (DOLS<sup>41</sup> ) and fully modified OLS (FMOLS), which confirm our results. Both DOLS and FMOLS suggest the existence of a cointegrating relation by failing to reject the Hansen test for parameter instability. Both methodologies also fail to reject

> 39 As stressed by MacDonald and Ricci (2003), many studies find the real exchange rate of commodity exports to be strongly correlated with commodity prices though weakly correlated with terms of trade. This can be rationalized by: (i) the inclusion of goods with sluggish price adjustments and incomplete pass-through in aggregate terms of trade indices, (ii) the higher relative accuracy of commodity prices compared to export and import deflators, and (iii) the higher frequency of commodity price data that may influence financial decisions regarding currencies of commodity exporters. In contrast to these studies, we find that real soybean prices decrease the significance of productivity differentials between agriculture and services (tradables vs nontradables).

> 40 We fail to reject skewness in all specifications upon inclusion of two dummy variables taking value 1 in 1982 and 2002, respectively, and value 0 in all other years. Results are robust to this specification. 41 The DOLS estimators use HAC standard error correction and contain leads and lags of order 0 and 1, respectively.

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