Fernando Alexandre () (Escola de Economia e Gestão and NIPE, University of Minho) Pedro Bação () (University of Coimbra and GEMF) João Cerejeira () (Escola de Economia e Gestão and NIPE, University of Minho) Miguel Portela () (Escola de Economia e Gestão and NIPE, University of Minho and IZA)
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Economic theory and empirical evidence suggest that fluctuations in exchange rates may have strong reallocation effects. Accession to the Exchange Rate Mechanism in 1992, and then to the European Monetary Union in 1999, implied a drastic change in the behaviour of Portugal’s exchange rate indexes. The analysis of those indexes is therefore bound to play an important role in the study of the evolution of the Portuguese economy in the last two decades. However, there are many alternative exchange rate indexes. In this paper, we compute and compare aggregate and sector-specific exchange rate indexes for the Portuguese economy. We find that alternative effective exchange rate indexes are very similar between them. We also find that sector-specific effective exchange rates are strongly correlated with aggregate indexes. Nevertheless, we show that sector-specific exchange rates are more informative than aggregate exchange rates in explaining changes in employment: whereas aggregate indexes are statistically insignificant in employment equations, regressions using sector-specific exchange rate indexes show a statistically significant and economically large effect of exchange rates on employment.
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Paper provided by Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação in its series GEE Papers with number
0016.
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