Exchange-rate regime and sectorial profitability in a small open economy: evidence from Argentina’s recent experience

This paper studies, both theoretically and empirically, tradable (T) and non-tradable (N) profit rates dynamics in a small, price-taker peripheral economy under foreign exchange controls and parallel exchange rates (ER). Using a state-space econometric representation of the Argentine economy for the period 2016–2023, we found evidence to support three main hypotheses derived from the theoretical models. First, an official exchange rate depreciation increases tradable goods profit rates but has no short-term effect on non-tradeable goods profitability. Second, the rise of the parallel exchange rate increases sector N’s profit rate but has no effect on T’s. Moreover, this effect depends on the magnitude of the ER gap in a positive, but non-linear way. Third and finally, over sufficient time, both profit rates tend to influence each other, through the action of competition. This means that, eventually, and increase (depreciation) in the official exchange rate exerts its influence on sector N’s profit rate; while, if sufficiently persistent and big enough, a rise in the financial ER ends up affecting sector T’s profit rate too.