Sectoral Real Exchange Rates and Manufacturing Exports: A Case Study of Latin America

Abstract

Standard theory considers the real exchange rate (RER) as export determinant. A common limitation of cross-country evidence is the use of effective (REER) or bilateral (BRER) RER indices, both of which have the same values across sectors. The novel contributions of this paper are a variety of goods trade model, to exploit cross-sector variations by constructing a unique sectoral bilateral RER index (SBRER) for 12 Latin American countries, 21 sectors and 38 trade partners, and to estimate the effect of RER movements on manufacturing exports during 2001-2018. The results show that the SBRER is a significant determinant of aggregate manufacturing exports, whereas the REER and BRER appear not to be significant. Sectoral export elasticities moreover indicate that in Latin America mainly low-technology sectors are affected by RER movements. Overall these findings indicate that sectoral differences matter and provide new evidence on the effect of RER movements on Latin American exports.