Structural real exchange rate and unemployment interdependencies in Argentina

Abstract

Based on a three-sector micro-founded model of a small open economy, this paper investigates the interdependences between the structural real exchange rate (defi ned as the relative prices tradable to non-tradable goods prices) and the unemployment rate with an application to Argentina. The empirical results suggest a signifi cant, negative relationship between the structural real exchange rate and the rate of unemployment, suggesting that an appreciating real exchange rate may lead to Dutch disease effects – which effectively contract the size of the manufacturing sector – and damage long-term growth and employment opportunities.