Uruguay: Selected Issues

International Monetary Fund

No 2018/024, IMF Staff Country Reports from International Monetary Fund

Abstract: 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.

Keywords: ISCR; CR; dollarization; exchange rate; deposit dollarization; productivity; exchange rate movement; credit dollarization; government investment multiplier; VAR model; Exchange rates; Consumption; Income; Labor productivity; Private consumption; Global; Caribbean (search for similar items in EconPapers)
Pages: 49
Date: 2018-01-31
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