Long-term effects of real exchange rate volatility and institutional quality on economic complexity

1 Apr 2025 | Publication

Long-term effects of real exchange rate volatility and institutional quality on economic complexity

  • Publication type: CEPAL Review
  • Author: Sousa, Rafael Moraes de; Veríssimo, Michele Polline
  • Physical description: páginas 65-83
  • Publisher: ECLAC
  • UN symbol (Signature): LC/PUB.2025/1-P
  • Date: 1 April 2025
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Abstract

This article analyses whether real exchange rate volatility and institutional quality, combined as conditioning variables of the productive specialization of economies, can have a negative impact on a country’s ability to achieve greater economic sophistication, especially in countries with a commodity-dominated and natural resource-based export basket. The methodology used consists of panel cointegration estimation (pooled mean group) using data from 1995 to 2018 for a sample of 54 countries. The results indicate that real exchange rate volatility is indeed an obstacle to the implementation of structural measures aimed at diversification and sophistication of a country’s productive fabric, while the quality of its institutions has a positive effect on its economic complexity and increases the possibilities for developing local capabilities.