Determinants of the structural real exchange rates and economic structures in Argentina, Chile and Mexico

A theoretical model, applied to Argentina, Chile and Mexico, shows how exogenous shocks impact on the structural real exchange rate (SRER, defined by the relative tradable to non-tradable price) and sectoral shares. First, a simulation approach designed to test how rich the theoretical model is in providing predictions: a) captures the behaviour of the Argentinean series quite well but its ability to predict the Chilean and Mexican variables differs between variables and b) shows that the collapse of the Argentinean currency, at the end of 2001, was necessary to correct a 38.9% SRER misalignment. In addition, a cointegration approach shows that: a) productivity improvements in the Mexican manufacturing sector reduce its share to GDP, b) labour endowments influence positively the Chilean SRER and both tradable sectors in Argentina and Mexico, while they reduce the Chilean primary sector, c) terms of trade improvements depreciate the SRER of all countries but reduce the size of the primary sector in Chile and Mexico, d) government spending reduces the Mexican SRER and the primary and manufacturing shares in Argentina while it increases the Mexican SRER and manufacturing shares, e) additional external debt reduces the Argentinean SRER and reduces (increases) the Argentinean and Mexican primary (manufacturing) shares and f) the collapse of the Argentinean currency depreciated its SRER by about 31.1% with an 18% overshooting. The benchmarking of the simulated and cointegrated results for Argentina reveals that the cumulated Argentinean SRER misalignment before the collapse of its currency was due to fundamental factors.