Prepared by Felipe Zanna.
These results are based on the WEO assumptions of August 2009.
Tokarick (2009) provides estimates of elasticities for several countries using GATP and ERALIC project data. The estimate for Uruguay is -0.64, assuming that, as a small country, its export demand and import supply elasticities are infinite. This contrasts with the CGER assumptions, which correspond to infinite export supply and import supply elasticities, implying that a country is able to influence foreign prices by how much they sell. Under these assumptions, the elasticity for Uruguay is close to -0.2, which appears to be on the low side and implies a required adjustment of the real exchange rate in the range of -14 and -2.5 percent.
Using the CGER implied elasticity for Uruguay of -0.2, which seems to be on the low side, would imply a required adjustment of the real exchange rate of -1.5 percent, on average.
The misalignment was computed as the deviation of the medium-term ERER from the medium-term real effective exchange rate (REER). The latter was held constant at the current level of -0.18, in log terms (corresponding to 83.6) and calculated as the average of the first 6 months of 2009. On the other hand, CGER’s and Vitek’s estimates project medium-term ERERs of -0.12 and -0.14 (in log terms), respectively.
Since the constant is country specific and Uruguay is not in the CGER sample, the constant to apply the CGER estimates was obtained by setting the sample-average ERER equal to the sample-average REER, for the post-liberalization period 1990-2008; thus, the implicit assumption was that the average misalignment in the estimation period is zero.