Unemployment and Real Exchange Rate Dynamics in Latin American Economies

Instituto de Economia, PUC Chile, Documento de Trabajo N° 337

26 Pages Posted: 8 Jan 2009

See all articles by Raimundo Soto

Raimundo Soto

Pontificia Universidad Católica de Chile - Institute of Economics

Date Written: June 2, 2008

Abstract

Edwards and Savastano's (2000) survey identify two important limitations of the real exchange rate (RER) literature: the lack of explicit derivation of flow and stock equilibrium variables as determinants of the equilibrium RER and the failure to allow for unemployment. This paper develops a general equilibrium model that includes both elements, as well as other traditional determinants of the RER such as productivity, terms of trade and government policies. The model is tested against the experience of ten Latin American economies in the 1970-2004 period. From an econometric point of view the model is consistent with the evidence, providing an estimate of the RER misalignment. When evaluating the contribution of labor market distortions to changes in the equilibrium RER, they appear to be less significant than changes in productivity or government policies.

Keywords: Real exchange rate, unemployment, general equilibrium, misalignment

JEL Classification: F31, F37, J01

Suggested Citation

Soto, Raimundo, Unemployment and Real Exchange Rate Dynamics in Latin American Economies (June 2, 2008). Instituto de Economia, PUC Chile, Documento de Trabajo N° 337 , Available at SSRN: https://ssrn.com/abstract=1323800 or http://dx.doi.org/10.2139/ssrn.1323800

Raimundo Soto (Contact Author)

Pontificia Universidad Católica de Chile - Institute of Economics ( email )

Casilla 76
Correo 17
Santiago
Chile

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