Fundamentals of Equilibrium Real Exchange Rate

This paper examines the evolution of price competitiveness of Uruguayan economy, assessing the presence of "Balassa-Samuelson Effect" and a change in the economy’s international integration, in a context of income and aggregate expenditure growth, through Johansen methodology. We found a long-term relationship between RER, the differential in labor productivity between Uruguay and U.S., extra-regional exports and total consumption. Furthermore, we found that the elasticities of RER to its long-term fundamentals are in line with the theory. We conclude that the decline in the equilibrium real exchange rate in the last two decades is due to the movement of its fundamentals.