## wpiea2021002-print-pdf

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### Key questions and approach
- Primary questions: Why has growth dropped? Is the slowdown temporary, or is growth reverting to a long-term, 1-percent trend after a brief spike? How to make growth more sustainable over the long run?
- Analytical approach: Differentiate short-term causes of the recent boom (2004–2014) from sustainable, longer-term causes; identify structural impediments to growth via international comparisons with fast-converging peers and export competitors.

### Drivers of the 2004–2014 boom
- Confluence of demand- and supply-side factors: bounce-back from prior crisis, commodity price boom, increasing external demand, emergence of new export sectors.
- Recovery from crisis:
  - Uruguay’s GDP growth averaged -1.7 percent over 1998–2003.
  - Augmented Dickey-Fuller test strongly rejects the unit-root null at 1 percent level (series is mean-reverting).
- Terms of trade and external demand:
  - Around 50 percent of Uruguayan exports are agricultural commodities and their derivatives.
  - Soybean production and exports rose to account for 15 percent of total exports in 2014.
  - Soybeans accounted for over half of total exports to China by the end of the boom.
  - Non-resident deposits declined from about 40 percent of total deposits in 2001 to less than 10 percent in 2018.
  - Goods exports to Argentina declined from close to 15 percent of total goods exports in 2001 to less than 5 percent in 2018.
  - Service exports to Argentina (notably tourism) constitute over 15 percent of total exports; tourism exports grew at an annual rate of 16 percent during the boom.
  - From 2002 to 2012, annual FDI from Argentina increased by 26 times.
- Exchange rate appreciation:
  - Nominal exchange rate vs. USD appreciated over 20 percent from 2004 to 2014.
  - Real GDP in PPP terms almost doubled over the boom period, compared to 68 percent increase without PPP adjustment.
- Sectoral structural change:
  - ICT exports grew from 2 percent of total exports at the beginning of the boom years to over 10 percent.
  - Over 50 percent of ICT exports were to the U.S. market during the period described.
  - Cellulose pulp (forestry/paper) emerged as a high-growth export industry following UPM investment.
  - Government incentives: exports of software and related services are 100 percent exempted from income tax (Decree 150/2007).
- Productivity:
  - Measured TFP increased over the boom period; estimated TFP growth declined substantially after 2014.
  - High correlation between output growth and estimated TFP growth reflects positive terms-of-trade shock.

### Numerical decomposition of growth drivers
- Rebound from crisis: accounts for about 16 percent of the boom years’ growth premium.
- Commodity exports (e.g., soybean and livestock): over 20 percent of the growth premium.
- Exchange rate appreciation and increased demand from Argentina: over 15 percent of the growth premium.
- Export growth from new industries (ICT outsourcing and paper pulp): about 14 percent of the growth premium.
- Caveats: estimates susceptible to biases (difficulty separating direct vs. indirect impacts, simultaneity bias, likely understatement of positive commodity price shock contribution).

### Sustainability assessment by sector
- Agricultural commodities:
  - Real agricultural commodity prices display a trend decline over the long run; recent WEO forecasts point to a subdued medium-term trend.
  - China explained over 60 percent of world demand increase in soybeans in the prior decade-and-a-half; soybean price has been on the decline since 2013.
  - Uruguay’s soybean exports declined after 2013; Paraguay and Brazil showed stronger responses due to lower production costs and higher productivity.
  - Soybean productivity is close to the technological frontier (as represented by the U.S.); U.S. soybean sector productivity historically grew at an average rate of 1 percent per year.
  - Conclusion: agricultural commodity sector alone may not support sustained convergence without investment driven by external demand and elevated prices.
- Forestry and paper pulp:
  - Industry enjoys relatively stable export prices and steadily increasing world demand; second pulp mill positions the industry to become the largest exporting industry.
  - Long-run impact depends on ability to stimulate auxiliary local industries and overcome structural constraints.
- High value-added services (ICT):
  - Comparative advantage: good telecom infrastructure and a relatively well-educated workforce versus regional peers.
  - Uruguay lags top ICT exporting countries on education quality measures: secondary school completion rate, PISA scores in science and math; labor supply quality and quantity, and labor market allocation effectiveness, are potential constraints.

### Inflation and real exchange rate dynamics
- During the boom, nominal appreciation supported short-term growth by increasing de facto domestic purchasing power in a small open economy dependent on imports.
- From 2004 to 2014:
  - Uruguayan peso appreciated in real effective terms by 47 percent.
  - Real appreciation against the U.S. dollar was about 100 percent.
- High inflation and persistently appreciating real exchange rate:
  - Increase production costs in the export sector, reduce firms’ profit levels and capacity for future investments, and raise vulnerability to adverse export price shocks.
  - Real exchange rate remaining elevated after nominal reversal (post-boom) may have contributed to the “sudden stop” in growth after 2014.

### Empirical SVAR evidence on external shocks (Annex II)
- Data and sample:
  - Countries: Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay.
  - Quarterly data from 2000 to 2019.
  - Commodity export price index: world commodity prices weighted by country commodity export basket.
  - Variables logged and first differenced.
- SVAR specification:
  - Z_t = [cxp_t  exr_t  y_t  p_t]^T; cxp_t follows AR(1) and is contemporaneously unaffected by other variables.
- Empirical findings — inflation responses:
  - For most countries, a positive commodity export price shock leads to higher inflation.
  - Uruguay: response of inflation to positive commodity export shocks is among the largest and most persistent in the sample.
  - Negative export price shocks: inflation in Uruguay does not respond consistently; magnitude smaller than for positive shocks.
- Empirical findings — exchange rate responses:
  - Positive export price shocks lead to appreciation in all sample countries; impacts largely dissipate after 8-10 quarters in most countries.
  - Uruguay: appreciation is more persistent.
  - Negative export price shocks lead to depreciation in the short run; for Uruguay the effect turns the opposite direction after about 6 quarters.
- Overall interpretation for Uruguay:
  - Asymmetrical responses: positive shocks → inflation increases and exchange rate appreciates (real appreciation); negative shocks → ambiguous responses.
  - Consistent with observed behavior during and after the commodity price boom.

### Structural assessment and cross-country comparisons (Section 4.1)
- Investment and capital accumulation:
  - Investment rate declined from a peak of 25 percent of GDP in 2012 to around 16 percent in 2017.
  - Peak investment rate during the boom was lower than the average of high-growth peers.
  - Private sector credit to GDP ratio is perennially lower than in most peer countries.
- Labor market:
  - Uruguay fares relatively well on labor welfare, inequality, poverty, and informality.
  - Needs greater labor market flexibility for sectoral reallocation and to maintain employment.
  - WEF survey: Uruguay perceived as less flexible than high-growth peers and trade rivals in wage flexibility and hiring/firing regulations.
  - Population growth is low and population is older compared to high-growth countries at a similar development stage.
- Human capital:
  - Quantity of education (average years of schooling) at par with high-growth peers.
  - Perceived quality of the education system is lower than both high-growth peers and trade rivals.
  - Uruguay scored 12–15 percent lower in the math and science scales of PISA compared to the high-growth peer group.
- Productivity:
  - Average TFP growth over the past 10 years was a little over 1 percent per year (close to historical average).
  - Current TFP growth estimated at around 0-0.5 percent.
  - TFP growth lower than the average of high-growth peers, though higher than trade rivals.
- Institutional quality:
  - Uruguay scores better than the average of both comparison groups in judicial independence and corruption measures.
  - Room for improvement in law enforcement amid rising crime rates.
- Infrastructure:
  - Quality of transport infrastructure trails high-growth peers and has declined.
  - Infrastructure spending dropped since the mid-1980s and stayed around 4 percent of GDP per year; for the last few years it fluctuated at around 2 percent of GDP.
  - The 2004–2014 boom did not produce a significant increase in infrastructure investment; overall infrastructure stock has not improved, or slightly declined depending on depreciation assumptions.
- Business environment and private sector dynamism:
  - Uruguay broadly at par on some business environment aspects; improvements during the boom in tax and contribution burden, business regulation quality, and export costs.
  - Need to reduce compliance costs of international trade relative to high-growth peers and to reduce time and cost of registering property.
  - New business activity (new firm registrations per 1,000 adult population) is 70 percent lower than both peer groups and has trended downward over the past 10 years.
- Macroeconomic environment:
  - Over a 10-year span, annual growth in real GDP per capita averaged 4.9 percent in Uruguay versus 2.3 percent for Latin America and the Caribbean (LAC).
  - Uruguay preserved macroeconomic stability despite severe regional shocks; spillovers from Argentina were limited to the real sector and exchange rate channels due to a robust financial sector with reduced exposure to Argentina.
  - Public debt level (non-financial public sector) and real exchange rate volatility are higher than average of comparison groups.
  - Uruguay has much higher inflation than its trade rival group (excluding Argentina) and high-growth peer group in recent years.

### Conclusions on drivers and outlook
- The 2004–2014 boom was driven by positive external demand shocks, rebound from crisis, and emergence of new sectors; the commodity super-cycle ended in 2014.
- External conditions are no longer supportive: commodity prices expected to remain subdued; potential growth of the global economy and key trading partners is much lower; downside risks to global growth persist.
- Emerging industries (ICT and related business services, forestry and paper pulp) may be more sustainable but require leveraging strengths and removing structural bottlenecks.
- Institutional strengths and ongoing infrastructure projects (upgrading road networks and introducing a central railway) support growth prospects.

### Policy recommendations (as stated)
- Strengthen a strong, flexible, and equitable labor market to support inclusive growth amid low population growth and declining labor force participation; improve labor market efficiency and flexibility to facilitate allocation to high productivity sectors, accommodate large negative shocks, and incentivize employment.
- Improve the quality and quantity of education to match needs of skill-intensive new sectors.
- Alleviate low population growth and aging pressures by further raising female participation or facilitating integration of immigrants into the labor market.
- Diversify out of the commodity sector: avoid replacing one agro-commodity with another; focus diversification on sectors that create higher value added and knowledge spillovers.
- Address recent deterioration in crime statistics before they become macro critical or affect perceptions of law enforcement.
- Maintain a strong and credible macro policy framework: reduce debt and inflation and keep them at low levels to support structural reforms and reduce the appreciation bias in the real exchange rate.
- Leverage temporary inflows and sectoral booms to catalyze durable productivity-enhancing investments; foster auxiliary industries around forestry/pulp and improve education and labor supply for ICT and high-value services.

*Source: wpiea2021002-print-pdf (IMF country analysis excerpt).*

### 1.6 percent from 2015 to 2018.  Why has growth dropped?  Is the slowdown temporary, or

### wpiea2021002-print-pdf - 1.6 percent from 2015 to 2018.  Why has growth dropped?  Is the slowdown temporary, or

### Key questions and approach
- Primary questions: Why has growth dropped? Is the slowdown temporary, or is growth reverting to a long-term, 1-percent trend after a brief spike? How to make growth more sustainable over the long run?
- Analytical approach: Differentiate short-term causes of the recent boom (2004–2014) from sustainable, longer-term causes; identify structural impediments to growth via international comparisons with fast-converging peers and export competitors.

### Drivers of the recent boom (2004–2014)
- Confluence of demand- and supply-side factors: bounce-back from prior crisis, commodity price boom, increasing external demand, emergence of new export sectors.
- Recovery from crisis:
  - Uruguay’s GDP growth averaged -1.7 percent over 1998–2003.
  - Growth series is mean-reverting; an augmented Dickey-Fuller test strongly rejects the unit-root null at 1 percent level.
- Terms of trade and external demand:
  - Around 50 percent of Uruguayan exports are agricultural commodities and their derivatives.
  - Soybean production and exports rose from nearly negligible in the early 2000s to account for 15 percent of total exports in 2014.
  - China became the most important export destination by end of the boom, with soybeans accounting for over half of total exports to China.
  - Non-resident deposits declined from about 40 percent of total deposits in 2001 to less than 10 percent in 2018.
  - Goods exports to Argentina declined from close to 15 percent of total goods exports in 2001 to less than 5 percent in 2018.
  - Service exports to Argentina (notably tourism) constitute over 15 percent of total exports; tourism exports grew at an annual rate of 16 percent during the boom.
  - From 2002 to 2012, annual FDI from Argentina increased by 26 times.
- Exchange rate appreciation:
  - Nominal exchange rate vs. USD appreciated over 20 percent from 2004 to 2014.
  - Real GDP in PPP terms almost doubled over the boom period, compared to 68 percent increase without PPP adjustment.
- Sectoral structural change:
  - ICT exports grew from 2 percent of total exports at the beginning of the boom years to over 10 percent.
  - Over 50 percent of ICT exports were to the U.S. market during the period described.
  - Cellulose pulp (forestry/paper) emerged as a high-growth export industry following UPM investment.
  - Government incentives: exports of software and related services are 100 percent exempted from income tax (Decree 150/2007).
- Productivity:
  - Measured total factor productivity (TFP) increased over the boom period; estimated TFP growth declined substantially after 2014.
  - High correlation between output growth and estimated TFP growth in Uruguay reflects positive terms-of-trade shock.

### Relative importance of growth drivers (numerical decomposition)
- Rebound from crisis: accounts for about 16 percent of the boom years’ growth premium (growth beyond historical average).
- Commodity exports (e.g., soybean and livestock): over 20 percent of the growth premium.
- Exchange rate appreciation and increased demand from Argentina: over 15 percent of the growth premium.
- Export growth from new industries (ICT outsourcing and paper pulp): about 14 percent of the growth premium.
- Caveats: estimates susceptible to biases (difficulty separating direct vs. indirect impacts, simultaneity bias, likely understatement of positive commodity price shock contribution).

### Sustainability assessment of growth drivers
- Agricultural commodities:
  - Real agricultural commodity prices display a trend decline over the long run; recent WEO forecasts point to a subdued medium-term trend for commodity prices.
  - Growing demand from China explained over 60 percent of world demand increase in soybeans in the prior decade-and-a-half; soybean price has been on the decline since 2013.
  - Uruguay’s soybean exports declined after 2013; neighboring competitors (Paraguay, Brazil) showed stronger responses due to lower production costs and higher productivity.
  - Soybean productivity (output per planting area) is close to the technological frontier (as represented by the U.S.); U.S. soybean sector productivity historically grew at an average rate of 1 percent per year.
  - Conclusion: agricultural commodity sector alone may not support sustained convergence without investment driven by external demand and elevated prices.
- Forestry and paper pulp:
  - Industry enjoys relatively stable export prices and steadily increasing world demand; second pulp mill positions the industry to become the largest exporting industry.
  - Long-run impact depends on ability to stimulate auxiliary local industries and overcome structural constraints.
- High value-added services (ICT):
  - Comparative advantage rests on good telecom infrastructure and a relatively well-educated workforce versus regional peers.
  - Uruguay lags top ICT exporting countries on education quality measures (secondary school completion rate, PISA scores in science and math); labor supply quality and quantity, and labor market allocation effectiveness, are potential constraints.

### Role of inflation and real exchange rate
- During the boom, nominal appreciation supported short-term growth by increasing de facto domestic purchasing power in a small open economy dependent on imports.
- From 2004 to 2014:
  - Uruguayan peso appreciated in real effective terms by 47 percent.
  - Real appreciation against the U.S. dollar was about 100 percent, much higher than the nominal appreciation—implying a growing positive inflation gap with trade partners.
- High inflation and a persistently appreciating real exchange rate:
  - Increase production costs in the export sector, reduce firms’ profit levels and capacity for future investments, and raise vulnerability to adverse export price shocks.
  - Real exchange rate remaining elevated after nominal reversal (post-boom) may have contributed to the “sudden stop” in growth after 2014 and to Uruguay’s different response to price shocks compared to some neighboring countries.

### Implications for policy and structural reform (inferred from assessment)
- Strengthen sustainable, supply-side drivers beyond commodity dependence: foster auxiliary industries around forestry/pulp, improve education quality and labor supply for ICT and high-value services.
- Address cost structure and competitiveness in agricultural exports to reduce vulnerability to price shocks (cost competitiveness relative to Brazil and Paraguay).
- Contain inflation and address inflation differentials to avoid persistent real appreciation that undermines tradable sectors’ competitiveness.
- Leverage temporary inflows and sectoral booms to catalyze durable productivity-enhancing investments.

*Source: wpiea2021002-print-pdf (IMF country analysis excerpt).*

### Section 4.1.

### Section 4.1.

### External price shocks and inflation dynamics
- SVAR model comparing Uruguay and regional peers shows that inflation and real exchange rate both respond positively following positive external price shocks.
- The response pattern is asymmetrical: negative export price shocks do not lead to lowering of inflation or real exchange rate in Uruguay.
- One contributing factor to the upward bias in inflation is the close linkage with the Mercosur market, Argentina in particular.
- Prices of tourism and other related services tend to be locally determined and, due to reliance on Argentinian demand, fluctuations in the Argentine economy may directly impact the price level of the non-tradable sector in Uruguay, which feeds into inflation.
- When economies in the region are hit by the same external shocks (e.g., a surge in commodity prices), pressure on inflation and real exchange rate tends to come from both global and regional levels, amplifying their impact.
- Inflation did not come down when external demand dropped or when the terms of trade shock turned negative; wage indexation to past inflation may create a feedback loop that makes it harder for inflation to adjust down.

### Structural factors for growth sustainability — overview
- Structural reforms to increase the dynamism of the domestic private sector are needed to improve sustainability of supply-side growth drivers.
- Cross-country comparisons conditional on development stage are used to identify reform priorities.
- High-growth peer group selection: countries that were once at a similar development stage to Uruguay in 2018 (defined as GDP per capita relative to the US falling within a 10 percent band around the level of Uruguay 2018) and that exhibited the fastest speed of economic convergence (defined as the relative GDP per capita growth being higher than 70 percent of the whole sample) in the subsequent 10 years, without significant reversal up to 2018.
- Trade competitors (contemporaneous trade rivals) are defined by cosine similarity between vectors of “revealed comparative advantage” scores for all SITC 4-digit goods.
- Comparisons cover factors affecting capital input, labor input, human capital, and total factor productivity.

### Investment and capital accumulation
- Investment rate in Uruguay declined from a peak of 25 percent of GDP in 2012 to around 16 percent in 2017.
- The peak investment rate during the boom years was lower than the average of high-growth peer countries.
- Private sector credit to GDP ratio is perennially lower than in most peer countries, despite survey perceptions that obtaining financing is not difficult.
- Low private sector credit may reflect low demand for real investment, financing models of private businesses, and structural issues such as limited banking sector competition and high lending rates.

### Labor market
- Uruguay fares relatively well on labor welfare indicators, inequality, poverty, and informality.
- As Uruguay closes gaps with advanced economies, maintaining social protection while preserving economic efficiency and growth is a challenge.
- Uruguay needs an adequate degree of labor market flexibility for sectoral reallocation (micro flexibility) and to maintain employment (macro flexibility).
- World Economic Forum survey data indicate Uruguay is perceived as less flexible than both high-growth peers and trade rivals in wage flexibility and hiring and firing regulations; labor-employer cooperation appears less favorable.
- Population growth is low compared to high-growth countries at a similar development stage; Uruguay has slower population growth and an older population.

### Human capital
- Quantity of education in Uruguay is at par with high-growth peers (e.g., average years of schooling).
- Perceived quality of the education system is lower than in both high-growth peers and trade rivals.
- Uruguay scored 12–15 percent lower in the math and science scales of the PISA assessments compared to the high-growth peer group.

### Productivity
- Average TFP growth over the past 10 years was a little over 1 percent per year, close to the country’s historical average.
- Current TFP growth is estimated at around 0-0.5 percent.
- TFP growth rate is lower than the average of high-growth peers at a similar development level, though higher than the average of trade rivals.

### Institutional quality
- Uruguay scores better than the average level of both comparison groups in measures of judicial independence and corruption within the political system.
- There is room for improvement in law enforcement, which might reflect rising crime rates.

### Infrastructure
- Quality of transport infrastructure trails behind high-growth peers and has declined over the years.
- Infrastructure spending has dropped significantly since the mid-1980s and stayed at an average level of around 4 percent of GDP per year; for the last few years it fluctuated at around 2 percent of GDP.
- The boom years of 2004–14 did not see any significant increase in infrastructure investments; overall infrastructure stock has not improved, or even slightly declined depending on assumed depreciation rates.

### Business environment and private sector dynamism
- Uruguay is broadly at par with comparison groups on some business environment aspects (transaction costs associated with regulatory compliance for tradable sector, tax burden, licensing and permitting procedures), with improvements during the boom years in overall tax and contribution burden, quality of business regulations, and export costs.
- Room remains to reduce compliance costs of international trade relative to high-growth peers and to reduce time and cost of registering property.
- New business activity (new firm registrations per 1,000 adult population) is 70 percent lower than both peer groups and has trended downward over the past 10 years.

### Macroeconomic environment
- Over a 10-year span, annual growth in real GDP per capita averaged 4.9 percent in Uruguay, much higher than the 2.3 percent of Latin America and the Caribbean (LAC).
- Uruguay preserved macroeconomic stability despite severe regional shocks; spillovers from Argentina were limited to the real sector and exchange rate channels due to a robust financial sector with reduced exposure to Argentina.
- Public debt level (non-financial public sector) and real exchange rate volatility are higher than average levels of comparison groups.
- Uruguay has much higher inflation than its trade rival group (excluding Argentina) and high-growth peer group in recent years.

### Conclusion and policy recommendations
- The 2004–2014 boom was driven by positive external demand shocks, rebound from crisis, and emergence of new sectors; the external commodity price boom had both global and regional components.
- External conditions are no longer supportive: the commodity super-cycle ended in 2014; commodity prices are expected to remain subdued; potential growth of the global economy and key trading partners is much lower than a decade ago; downside risks to global growth persist; Uruguay remains subject to large exchange rate shocks from the region; prices of some key export sectors may face a global trend decline.
- Emerging new export industries (ICT and related business services, forestry and paper pulp) may be more sustainable drivers of growth but require leveraging strengths and eliminating structural bottlenecks for private sector development.
- Uruguay’s institutional strengths (strong public governance, stable regulatory environment for trade and foreign investment) and ongoing infrastructure projects (upgrading road networks and introducing a central railway) support growth prospects.

Policy recommendations (as stated)
- Strong, flexible, and equitable labor market to support inclusive growth in the face of low population growth and declining labor force participation; further improvements in labor market efficiency and flexibility to facilitate labor allocation to high productivity sectors, accommodate large negative shocks, and incentivize employment.
- Quality and quantity of education should match the needs of skill-intensive new sectors.
- Alleviate low population growth and aging pressures by further raising female participation or facilitating integration of immigrants into labor market.
- Diversification out of the commodity sector is important for growth going forward. Recent large FDI investment in paper pulps makes forestry quickly become the new "soybeans" for Uruguay; replacing one agro-commodity with another may not be ideal—diversification strategies should focus more on sectors that create higher value added and knowledge spillovers.
- Address recent deterioration in crime statistics before they become macro critical or affect perception on law enforcement.
- Maintain a strong and credible macro policy framework: efforts to reduce debt and inflation and keep them at low levels will lay the foundations for structural reforms and help reduce the appreciation bias in real exchange rate.

*Source: wpiea2021002-print-pdf - Section 4.1.*

### Annex I. Augmented Dickey-Fuller Test

### Annex I. Augmented Dickey-Fuller Test

### Augmented Dickey-Fuller specification and results
- The test is run by fitting the annual real GDP series (y_t) to the model:
  - ∆y_t = α + β y_{t−1} + γ_1 ∆y_{t−1} + γ_2 ∆y_{t−2} + ··· + γ_k ∆y_{t−k} + ε_t
- Null hypothesis:
  - β = 0, i.e. GDP follows a random walk.
- Result:
  - The null hypothesis is rejected at 1 percent level for all lag specifications except for k = 10.
- The table below (in the source) presents the test statistics.

### Notes
- Annual real GDP series and lag specifications are those used in the fitted model.

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### Annex II. Commodity Export Price’s Impact on Inflation and Exchange Rate

### Data and sample
- Countries included (nine commodity exporting countries in Latin America): Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay.
- Frequency and sample period:
  - Quarterly data from 2000 to 2019.
- Data source of most variables: World Economic Outlook (WEO).
- Commodity export price index:
  - Compiled using world commodity prices weighted by the country’s commodity export basket.
- Variable transformations:
  - All variables are logged and first differenced to ensure stationarity.
- Footnote:
  - Estimations were also run using longer time series starting 1980. Most of the results are not sensitive to changes in time coverage.

### SVAR model specification
- Empirical model:
  - A_0 Z_t = A_1 Z_{t−1} + μ_t   (1)
- Vector of variables:
  - Z_t = [cxp_t  exr_t  y_t  p_t]^T
    - cxp_t: commodity export price index of the underlying country
    - exr_t: local currency to USD exchange rate
    - y_t: real GDP
    - p_t: CPI index
  - All variables are logged and first-differenced.
- Structural matrices and assumptions:
  - A_0 is a 4x4 lower triangular matrix, with 1 on the main diagonal, and E(μ_t μ'_t) = Σ.
  - Equation (1) rewritten:
    - Z_t = B Z_{t−1} + C ε_t
    - where B = A_0^{-1} A_1, ε_t = Σ^{-1/2} μ_t, and therefore E(ε_t ε'_t) = I. And C = A_0^{-1} Σ^{1/2}.
  - Since B_{1∗} = [b_{11} 0    0    0], the specification implies cxp_t follows an AR(1) process:
    - The commodity export price index is contemporaneously only affected by a shock to itself, and not by innovations to any other variables.
  - Rationale:
    - Commodity exports are important but countries are largely price takers in the world commodity market.

### Estimation approach
- The model (A_0, Σ, A_1) is estimated country by country.
- Sample split:
  - For each country the sample is split into two sub-samples:
    - Positive export price shocks: (∆cxp_t ≥ 0)
    - Negative export price shocks: (∆cxp_t < 0)
- Impulse responses plotted in source:
  - Figures 1 and 2: response of domestic prices to positive and negative commodity export price shocks, respectively, for each country.
  - Figures 3 and 4: response of nominal exchange rate to positive and negative commodity export price shocks, respectively.

### Empirical findings — inflation responses
- Theoretical ambiguity:
  - Positive export price shock may increase inflation via income effect (higher aggregate demand) but may reduce inflation via currency appreciation (cheaper imports); outcome depends on economy-specific factors.
- Empirical results:
  - For the majority of countries in the sample, Uruguay included, a positive commodity export price shock appears to lead to higher inflation.
  - Uruguay-specific findings:
    - In terms of magnitude and duration, the response of inflation in Uruguay to positive commodity export shocks is among the largest and most persistent compared to others in the sample.
    - For negative export price shocks, inflation in Uruguay does not respond in a consistent pattern, and the magnitude of the response is smaller compared to the positive-shock case.

### Empirical findings — exchange rate responses
- Positive export price shocks:
  - Lead to exchange rate appreciation in all countries in the sample.
  - In most countries the impact largely dissipates after 8-10 quarters.
  - For Uruguay the appreciation appears more persistent.
- Negative export price shocks:
  - Lead to exchange rate depreciation in the short run as in other countries.
  - For Uruguay the effect turns the opposite direction after about 6 quarters.

### Overall interpretation for Uruguay
- Price responses to commodity export price shocks are asymmetrical in Uruguay:
  - Positive shocks: inflation increases and exchange rate appreciates, leading to real exchange rate appreciation.
  - Negative shocks: responses of inflation and exchange rate are ambiguous.
- Consistency with historical behavior:
  - Results are consistent with observed behavior of inflation and real exchange rate in Uruguay during and after the commodity price boom in the 2000s.

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### Annex III. Country Groups
- The high-growth peer country group:
- The trade rival country group:

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### Annex IV. Structural Indicator Sources
- (Structural indicator sources listed in the source document.)

*Source: wpiea2021002-print-pdf - Annex I. Augmented Dickey-Fuller Test*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021002-print-pdf.pdf_