Real exchange rate and economic activity in Jamaica

Abstract

This paper uses Bayesian VAR Analysis to empirically evaluate the relationship between the deviations of the real effective exchange rate from its equilibrium and Jamaica's GDP (and its components) over the period 1998 to 2021. The paper finds that an appreciation in the real exchange rate is generally associated with a fall in Jamaica's GDP, but the impact is small and statistically insignificant. However, this paper finds evidence that an appreciation hurts the trade balance of goods and the export of goods and services. The paper also finds that the tourism industry is resilient to losses in competitiveness, which may reflect the impact of factors that are not captured in our model.