Exchange Rate Determinants in Paraguay: Trade, Monetary Policy, and Regional Spillovers

This paper analyzes the determinants of the U.S. dollar to Paraguayan guaraní (USD/PYG) exchange rate in the context of a small open economy exposed to commodity cycles, monetary policy differentials, and regional spillovers. Using monthly data and a log-linear regression framework, the study estimates a multivariate model incorporating an agricultural export price index, the interest rate differential between Paraguay and the United States, and the USD/BRL exchange rate. The results indicate strong explanatory power, with regional spillovers from Brazil and interest rate differentials emerging as the dominant short-run drivers of exchange rate movements, while agricultural prices play a secondary and more structural role. Keywords: Exchange rates, Paraguay, interest rate differential, agricultural prices, regional spillovers, USD/PYGJEL Classification: F31, F41, E43, O54