Rebecca Staniscia Koprik

Recent literature has revelead different transmission chennels of the effects of exchange rate volatility on economic growth. The present study investigates this relation for South America anda innovates by considering these transmission channels altogether. To meet this objective, an index of exchange vulnerability, denoted by kappa, is proposed and estimated. Specifically, the kappa index measures how bulnerable the economic environment is to the effect of exchange rate volatility, taking into acconunt the four economic environment is to the effect of exchange literature financial market development, investment desions under uncertainty, degree of commercial openness and historical high inflation or lack of creditbility of the monetary authorities. The index is constructed through the principal components analysis methodology using OECD and World Bank data. The results, indicate that the effects of exchange rate the economic environment becomes more relevant to economic growth than the adopted exchange rate policy.