Impacts of the Exchange Rate and the Global Interest Rate on Real Output for Ten Selected Latin American Countries

Abstract

This paper examines the effects of currency depreciation or appreciation, the changing global interest rate and other related macroeconomic variables on real GDP for ten selected Latin American countries, namely, Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela. The monetary policy reaction function is incorporated in the formulation of the model. There are several major findings. Currency depreciation hurts real GDP for Argentina, Brazil, Colombia, Mexico, Uruguay and Venezuela whereas the real exchange rate and real GDP exhibit a backward-bending relationship for Bolivia, Chile, Paraguay and Peru, suggesting that currency depreciation increases real GDP in early years whereas currency appreciation raises real GDP in recent years. Except for Bolivia and Paraguay, a higher global interest rate reduces real GDP. Expansionary fiscal policy is effective for Argentina, Mexico and Paraguay. Except for Chile, Paraguay and Venezuela, a higher expected inflation rate reduces real GDP. Hence, currency depreciation may be contractionary or expansionary, depending upon the level of real GDP or the state of economic development.