Uruguay: Selected Issues
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Summary:
This Selected Issues paper investigates the impact of exchange rate movements on private consumption in Uruguay. Uruguay is a highly dollarized economy, which makes the relationship between exchange rate movements and private consumption particularly complex. The paper shows that a large share of Uruguayan households is liquidity constrained, which allows the transitory real income shocks brought about by exchange rate pass-through to have a significant impact on consumption. Moreover, exchange rate pass-through is highly heterogenous, with relative prices of durables increasing (decreasing) following a depreciation (appreciation). This creates incentives for households to engage in intertemporal substitution where they buy durables when they are relatively cheaper. Data from Input–Output tables show that Uruguay produces a nontrivial amount of the tradable, durable goods it consumes, opening the door to contractionary depreciations. The results offer a potential explanation for the often noted ‘excess volatility of consumption’ in emerging markets for the case of Uruguay.
Series:
Country Report No. 2018/024
Subject:
Consumption Exchange rates Foreign exchange Income Labor productivity National accounts Private consumption Production
English
Publication Date:
January 31, 2018
ISBN/ISSN:
9781484339824/1934-7685
Stock No:
1URYEA2018002
Pages:
49
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