Aggregate and sector-specific exchange rate indexes for the Portuguese economy

Abstract

Economic theory and empirical evidence suggest that fluctuation in exchange rates may have strong reallocation effects. Accession to the Exchange Rate Mechanism in 1992, and then to the European Monetary Union em 1999, implied a drastic change in the behavior of Portugal´s exchange rate indexes. The analysis of those indexes is therefore bound ti play an important role in the study of the evolution of the Portuguese economy in the last two decades. However, there are many alternative exchange rate indexes.In this paper, we compute and compare aggregate and sector-specific exchange rate indexes for the Portuguese economy. We find that alternative effective exchange rate indexes are very similar between them. We also find that sector-specific effective exchange rates are strongly correlated with aggregate indexes. Nevertheless, we show that sector-specific exchange rates are more informative than aggregate exchange rates in explaining changes in employment: whereas aggregate indexes are statistically in employment equations, regressions using sector-specific exchange rate indexes show a statistically significant and economically large effect of exchange rates on employment.exchange rates; international trade; employment, EMU