Exchange Rate Devaluation and Import Substitution in Latin America and the Caribbean

Apr 2017
This paper assesses the LAC's import substitution response to the recent wave of currency devaluations. For this purpose, this document uses both descriptive data and a simple econometric model to establish the short-term relationship between exchange rate movements and import penetration (total and within manufacturing sector) in the region, with a special focus on those countries that had experienced the largest depreciations. The results suggest that there is a significant relationship between depreciation and the decrease in import penetration, indicating that a 1% increase in the local currency depreciation reduces the IP by 0.41% to 0.69% and varies in those sectors with a stronger presence of domestic production.