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Exchange Rates, the Competitiveness of Nations and Unemployment

Author

Listed:
  • Pedro Bação

    () (Faculdade de Economia da Universidade de Coimbra, Grupo de Estudos Monetários e Financeiros (GEMF))

  • António Portugal Duarte

    () (Faculdade de Economia da Universidade de Coimbra, Grupo de Estudos Monetários e Financeiros (GEMF))

  • Diana Machado

    (Faculdade de Economia da Universidade de Coimbra, Grupo de Estudos Monetários e Financeiros (GEMF))

Abstract

The main goal of this paper is to assess the impact of exchange rate fluctuations on economic activity, namely on unemployment. We estimate a Vector Autoregressive (VAR) model for each of the following major economies: Australia, Brazil, China, Germany, Japan, Switzerland, the United Kingdom and the United States of America. The VAR model comprises the following variables: the unemployment rate, the GDP growth rate, the inflation rate, the interest rate, and the real effective exchange rate. We use the Cholesky decomposition to identify the shocks that drive these variables. The results obtained using the Cholesky decomposition depend on the ordering of the variables; therefore we discuss the results obtained when different orderings are employed. Our results suggest that an exchange rate appreciation leads to an increase in unemployment in relatively small countries such as Australia, Switzerland and the UK, but not in Japan or in the USA. The results for Brazil, China and Germany do not appear to be satisfactory, possibly because the sample covers a period of important structural change in those countries.

Suggested Citation

  • Pedro Bação & António Portugal Duarte & Diana Machado, 2016. "Exchange Rates, the Competitiveness of Nations and Unemployment," GEMF Working Papers 2016-14, GEMF, Faculty of Economics, University of Coimbra.
  • Handle: RePEc:gmf:wpaper:2016-14.
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    References listed on IDEAS

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    Cited by:

    1. Juan Carlos Cuestas & Karsten Staehr & Javier Ordóñez, 2018. "Unit Labour Costs and the Dynamics of Output and Unemployment in the Southern European Crisis Countries," TUT Economic Research Series 41, Department of Finance and Economics, Tallinn University of Technology.

    More about this item

    Keywords

    Competitiveness; currency wars; exchange rate; monetary policy; unemployment; VAR model.;

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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