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Aggregate and sector-specific exchange rate indexes for the Portuguese economy

  • 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)

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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File URL: http://www.gee.min-economia.pt/RePEc/WorkingPapers/abcp16.pdf
File Function: First version, 2009
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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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Length: 34 pages
Date of creation: May 2009
Date of revision: May 2009
Handle: RePEc:mde:wpaper:0016
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  1. Tamim Bayoumi & Jaewoo Lee & Sarma Jayanthi, 2006. "New Rates from New Weights," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 4.
  2. Herman Z Bennett & Ziga Zarnic, 2009. "International Competitiveness of the Mediterranean Quartet: A Heterogeneous-Product Approach," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 919-957, November.
  3. Jose Manuel Campa & Linda S. Goldberg, 1998. "Employment versus Wage Adjustment and the US Dollar," NBER Working Papers 6749, National Bureau of Economic Research, Inc.
  4. Linda S. Goldberg, 2004. "Industry-specific exchange rates for the United States," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 1-16.
  5. Manuel de Heredia Caldeira Cabral, 2008. "Export Diversification And Technological Improvement: Recent Trends In The Portuguese Economy," GEE Papers 0006, Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação, revised Apr 2008.
  6. Luca Buldorini & Stelios Makrydakis & Christian Thimann, 2002. "The effective exchange rates of the euro," Occasional Paper Series 02, European Central Bank.
  7. Ekholm, Karolina & Moxnes, Andreas & Ulltveit-Moe, Karen-Helene, 2008. "Manufacturing Restructuring and the Role of Real Exchange Rate Shocks," CEPR Discussion Papers 6904, C.E.P.R. Discussion Papers.
  8. Paulo Soares Esteves & Carolina Reis, 2006. "Measuring export competitiveness: revisiting the effective exchange rate weights for the euro area countries," Working Papers w200611, Banco de Portugal, Economics and Research Department.
  9. William H. Branson & James Love, 1988. "U.S. Manufacturing and the Real Exchange Rate," NBER Chapters, in: Misalignment of Exchange Rates: Effects on Trade and Industry, pages 241-276 National Bureau of Economic Research, Inc.
  10. Michael W. Klein & Scott Schuh & Robert K. Triest, 1999. "Job creation, job destruction, and the real exchange rate," Working Papers 99-11, Federal Reserve Bank of Boston.
  11. Amador, João & Cabral, Sónia & Ramos Maria, José, 2007. "International Trade Patterns over the Last Four Decades: How does Portugal Compare with other Cohesion Countries?," MPRA Paper 5996, University Library of Munich, Germany.
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