Effects of Macroeconomic Policies on Sectoral Prices

Abstract

The effect of macroeconomic policies on the relative prices of internationally traded and domestic goods has been the subject of extensive study. Analysis of the way in which these policies then affect prices at the sectoral level is complicated by the heterogeneity of sectoral production: even the prices of single products usually are determined by both domestic and traded components. We present a framework which first traces the influence of macropolicy on the relative prices of exports, imports, and home goods. It then accounts for each sector's degree of “tradability,” which is based on the importance of trade in sectoral income, and the influence of macroeconomic policy on sectoral prices. To illustrate the use of this approach, it is applied to a simulation of trade liberalization in Argentina. Our results suggest that economywide policies had substantial negative effects on both the real exchange rate and the incentives to agricultural exports.