Exchange Rate Devaluation and Import Substitution in Latin America and the Caribbean
Mesquita Moreira, Mauricio; Pierola, Martha Denisse; Sánchez-Navarro, Dennis
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.