Uruguay: Selected Issues

January 31, 2018

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Format: Chicago

Uruguay: Selected Issues, (USA: International Monetary Fund, 2018) accessed December 21, 2024

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.

Subject: Consumption, Exchange rates, Foreign exchange, Income, Labor productivity, National accounts, Private consumption, Production

Keywords: Caribbean, Consumption, CR, Credit dollarization, Deposit dollarization, Dollarization, Exchange rate, Exchange rate movement, Exchange rates, Global, Government investment multiplier, Income, ISCR, Labor productivity, Private consumption, Productivity, VAR model

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Country Report No. 2018/024
Stock No:

1URYEA2018002
ISBN:

9781484339824
ISSN:

1934-7685

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