The Real Exchange Rate Role in a Resourcerich Developing Country: Heterogeneous Effects, Structural Bias and Hysteresis

What is the role of the real exchange rate in the performance of the tradable sector in a developing economy specialised in natural resource-related activities? In this article, we will answer this question, summarising the main results of three related papers of our own, which focus on the heterogeneity effects of the real exchange rate (RER) level on the export and import performance of different sectors in Argentina. The first paper employs the Mean Group method to estimate the RER-elasticities by individual products. Its main result highlights a wide range of heterogeneous responses of exports and imports to RER movements at the individual product level, being RER-elasticities in differentiated products and labour-intensive manufacturing goods substantially larger than those of primary and homogeneous products. This finding critically impacts the value of aggregate RER-elasticity -weighted by Argentina's trade basket shares- given that Argentina's economic structure is heavily specialised in primary and homogeneous products. The second and third paper takes advantage of the large devaluation of 2002 to study the development of new tradable sectors during a period of stable and competitive real exchange rate (SCRER). The third one studies the occurrence of import substitution episodes. Their main conclusions are: (i) the peak of the sectoral export surge and import substitution episodes occurred during the SCRER period; (ii) they are positively related to the labour intensity of sectors and their relatedness to already competitive sectors; (iii) sectors with export surges episodes show sign of hysteresis effects with a long-lasting increase of their export level after the end of the SCRER period; (iv) export surge episodes are positively correlated to sectors that have import substitution episodes during the SCRER period. The three papers highlight that the RER movements have heterogeneous effects on different sectors and that not every sector can take advantage of the higher tradable profitability.