Advanced Search
MyIDEAS: Login to save this article or follow this journal

Output and the real exchange rate in developing countries: an application to Mexico

Contents:

Author Info

  • Kamin, Steve B.
  • Rogers, John H.

Abstract

Since Mexico's devaluation of the peso in 1994, some observers have called for policies designed to keep the real exchange rate highly competitive in order to promote exports and output growth. However, over the past few decades, devaluations of the real exchange rate have been associated nearly exclusively with economic contraction, while real appreciations have been followed almost invariably by expansions in economic activity. The purpose of this paper is to attempt to disentangle the possible factors underlying this correlation--(1) reverse causation from output to the real exchange rate, (2) spurious correlation with third factors such as capital account shocks, and (3) temporary contractionary effects of devaluation--and determine whether, once those factors are accounted for, a positive, long-run effect of real depreciation on output can be identified in the data. Based on the results of a VAR model designed to explore the linkages between the real exchange rate and output, we conclude that even after sources of spurious correlation and reverse causation are controlled for, real devaluation has led to high inflation and economic contraction in Mexico. While changes in Mexico's economic structure and financial situation may qualify the future applicability of this conclusion, we view our findings as pointing to substantial risks to targeting the exchange rate at too competitive a level.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VBV-3YMFMSK-4/2/700fdb5f7ea17f5bccb94f857981f5ff
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 61 (2000)
Issue (Month): 1 (February)
Pages: 85-109

as in new window
Handle: RePEc:eee:deveco:v:61:y:2000:i:1:p:85-109

Contact details of provider:
Web page: http://www.elsevier.com/locate/devec

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 49-99, January.
  2. Steven B. Kamin, 1996. "Real exchange rates and inflation in exchange-rate based stabilizations: an empirical examination," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 554, Board of Governors of the Federal Reserve System (U.S.).
  3. Mendoza, Enrique & Uribe, Martin, 1997. "The Syndrome of Exchange-Rate-Based Stabilizations and the Uncertain Duration of Currency Pegs," Working Papers, Duke University, Department of Economics 97-30, Duke University, Department of Economics.
  4. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
  5. Martin Uribe, 1995. "Exchange-rate based inflation stabilization: the initial real effects of credible plans," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 503, Board of Governors of the Federal Reserve System (U.S.).
  6. J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
  7. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany.
  8. Rebelo, Sérgio, 1997. "What Happens When Countries Peg Their Exchange Rates? (The Real Side of Monetary Reforms)," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1692, C.E.P.R. Discussion Papers.
  9. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, Elsevier, vol. 61(1), pages 85-109, February.
  10. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, Elsevier, vol. 8(3), pages 445-456, August.
  11. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, World Bank Group, World Bank Group, vol. 6(2), pages 279-305, May.
  12. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  13. Alexander W. Hoffmaister & Carlos A. Végh, 1996. "Disinflation and The Recession-Now-versus-Recession-Later Hypothesis: Evidence from Uruguay," IMF Staff Papers, Palgrave Macmillan, vol. 43(2), pages 355-394, June.
  14. John H. Rogers & Ping Wang, 1993. "Output, inflation, and stabilization in a small open economy: evidence from Mexico," Research Paper 9315, Federal Reserve Bank of Dallas.
  15. Morley, Samuel A, 1992. "On the Effect of Devaluation during Stabilization Programs in LDCs," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 21-27, February.
  16. Carlos A. Végh Gramont & Alexander W. Hoffmaister, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis," IMF Working Papers 95/99, International Monetary Fund.
  17. Kamin, Steven B. & Rogers, John H., 1996. "Monetary policy in the end-game to exchange-rate based stabilizations: the case of Mexico," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 285-307, November.
  18. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-15, C.V. Starr Center for Applied Economics, New York University.
  19. Kiguel, Miguel A., 1992. "Exchange rate policy, the real exchange rate, and inflation : lessons from Latin America," Policy Research Working Paper Series 880, The World Bank.
  20. Pierre-Richard Agénor, 1991. "Output, devaluation and the real exchange rate in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 127(1), pages 18-41, March.
  21. Guillermo Calvo & Carlos A. Végh Gramont, 1991. "Exchange-Rate-Based Stabilization under Imperfect Credibility," IMF Working Papers 91/77, International Monetary Fund.
  22. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate," MPRA Paper 13765, University Library of Munich, Germany.
  23. Jorge E. Roldós, 1995. "Supply-Side Effects of Disinflation Programs," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 158-183, March.
  24. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 35(71), pages 226-238, 08.
  25. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
  26. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
  27. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:61:y:2000:i:1:p:85-109. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.