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Real Exchange Rate Uncertainty and Output: A Sectoral Analysis

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  • Gonzalo Varela

    ()
    (Department of Economics, University of Sussex)

Abstract

Developing countries exhibit a more uncertain economic environment than developed countries. Argentina, Brazil and Uruguay in particular, display high levels of real exchange rate uncertainty. Moreover, a succession of trade agreements among them, culminating in the creation of Mercosur in 1991 have increased intra-regional trade. This paper examines empirically the impact of real-e ective-exchange-rate (REER) uncertainty on the output of 28 manufacturing sectors in Argentina, Brazil and Uruguay over 1970-2002. It provides alternative uncertainty measures that take into account the non-normality of the REER distribution by considering its higher moments (skewness and kurtosis) and di erent degrees of sophistication in agents' expectation formation, and estimates an augmented supply function using sectoral data on output, prices, and including these measures of REER uncertainty. Two di erent sets of instruments are used for domestic prices, in order to deal with the simultaneity problem that arises in the estimation of the supply function. Res- ults suggest a negative non-negligible e ect of uncertainty on output, homogeneous across countries. Interestingly, there is evidence of threshold e ects, so that uncer- tainty a ects output negatively when it exceeds some critical level. In addition, the e ect is heterogeneous across sectors. This is explained by trade orientation, the intensity with which the sector trades within Mercosur and by sectoral productivity. Sectors that trade more intensively within Mercosur are more a ected by REER uncertainty than those predominantly oriented to the rest of the world. Second, more productive sectors are less a ected by REER uncertainty than those that are less productive.'

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Bibliographic Info

Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 2011.

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Date of creation: Feb 2011
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Handle: RePEc:sus:susewp:2011

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Keywords: Uncertainty; Exchange rates; Output growth; Regional Integration; In- strumental Variables;

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  1. Gonzalo Varela, 2011. "A Framework to Analyze the Impact of Exchange Rate: Uncertainty on Output Decisions," Working Paper Series 2411, Department of Economics, University of Sussex.
  2. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
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