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The Effects of Devaluation on Aggregate Output: Empirical Evidence from Africa

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  • Zelealem Yiheyis
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    Abstract

    This paper tests the contractionary devaluation hypothesis in the context of select African countries. The output effect of devaluation is examined within an empirical model that controls, among others, for the parallel currency premium, the rate of net capital inflow, the degree of capacity utilization and political instability. The model is estimated on pooled data drawn from 20 African countries, employing alternative indicators of devaluation and pooling procedures. The results indicate that the contemporaneous output effect of nominal devaluation is negative, providing statistical support for the hypothesis that devaluation is contractionary in the short run. On the other hand, the coefficient of the lagged rate of devaluation is found to be positive, implying that the contractionary problem is temporary. The magnitude of the observed contractionary effect appears to depend on the rate of net capital inflow and the degree of capacity utilization. Devaluations accompanied by augmented net capital inflow and implemented in the presence of excess capacity are found to be less contractionary than otherwise equivalent exchange-rate changes. The results also seem to imply that devaluations launched in the context of sizeable unofficial markets for foreign exchange are less injurious to aggregate economic activity than other exchange-rate adjustments.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/02692170500362264
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

    Volume (Year): 20 (2006)
    Issue (Month): 1 ()
    Pages: 21-45

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    Handle: RePEc:taf:irapec:v:20:y:2006:i:1:p:21-45

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    Keywords: Devaluation; exchange rates; output; Africa;

    References

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    1. Edward, Sebastian, 1986. "Are Devaluations Contractionary?," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 501-08, August.
    2. Shatz, Howard J. & Tarr, David G., 2000. "Exchange rate overvaluation and trade protection - lessons from experience," Policy Research Working Paper Series 2289, The World Bank.
    3. Fosu, Augustin Kwasi, 1992. "Political Instability and Economic Growth: Evidence from Sub-Saharan Africa," Economic Development and Cultural Change, University of Chicago Press, vol. 40(4), pages 829-41, July.
    4. Steven B. Kamin & Marc Klau, 1998. "Some multi-country evidence on the effects of real exchange rates on output," International Finance Discussion Papers 611, Board of Governors of the Federal Reserve System (U.S.).
    5. Himarios, Daniel, 1989. "Do Devaluations Improve the Trade Balance? The Evidence Revisited," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 143-68, January.
    6. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
    7. Jagdish N. Bhagwati, 1978. "Anatomy and Consequences of Exchange Control Regimes," NBER Books, National Bureau of Economic Research, Inc, number bhag78-1, octubre-d.
    8. Nunnenkamp, Peter & Schweickert, Rainer, 1990. "Adjustment policies and economic growth in developing countries : is devaluation contractionary?," Open Access Publications from Kiel Institute for the World Economy 1449, Kiel Institute for the World Economy (IfW).
    9. Kamal Upadhyaya & Mukti Upadhyay, 1999. "Output effects of devaluation: Evidence from Asia," Journal of Development Studies, Taylor & Francis Journals, vol. 35(6), pages 89-103.
    10. Augstin Kwasi Fosu, 2003. "Political Instability and Export Performance in Sub-Saharan Africa," Journal of Development Studies, Taylor & Francis Journals, vol. 39(4), pages 68-83.
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    Cited by:
    1. Huseyin Kalyoncu & Ilhan Ozturk & Seyfettin Artan & Kahraman Kalyoncu, 2009. "Devaluation and trade balance in Latin American countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 27(1), pages 115-128.

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