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On the transmission of exchange rate fluctuations to the macroeconomy: Contrasting evidence for developing and developed countries

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  • Magda Kandil

Abstract

The paper examines channels of interaction between exchange rate shifts and the macroeconomy. Exchange rate shifts are differentiated into anticipated and unanticipated components. Each component affects the demand and supply sides of the economy. Primarily, exchange rate shifts determine export competitiveness and the cost of imported inputs. The evidence reveals a relatively more important role for the cost channel in determining the real and inflationary effects in developing countries, compared with developed countries. Currency appreciation (depreciation), both anticipated and unanticipated, results in an increase (decrease) in output growth and a reduction (an increase) in price inflation in many developing countries. This evidence indicates the adverse effects of currency depreciation on macroeconomic performance in developing countries. Exchange rate policy should not be used to raise export competitiveness without considering the need for structural reforms in developing countries.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09638190500525795
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 15 (2006)
Issue (Month): 1 ()
Pages: 101-127

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Handle: RePEc:taf:jitecd:v:15:y:2006:i:1:p:101-127

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Related research

Keywords: Exchange rate; anticipated vs. unanticipated shocks; demand and supply channels; developing vs. developed countries;

References

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  1. Kandil, Magda & Mirzaie, Aghdas, 2002. "Exchange rate fluctuations and disaggregated economic activity in the US: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 1-31, February.
  2. Carlos A. Végh Gramont & Alexander W. Hoffmaister, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence from Uruguay," IMF Working Papers 95/99, International Monetary Fund.
  3. Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42 National Bureau of Economic Research, Inc.
  4. Barbone, Luca & Rivera-Batiz, Francisco, 1987. "Foreign capital and the contractionary impact of currency devaluation, with an application to Jamaica," Journal of Development Economics, Elsevier, vol. 26(1), pages 1-15, June.
  5. 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, vol. 61(1), pages 85-109, February.
  6. Gylfason, Thorvaldur & Radetzki, Marian, 1991. "Does Devaluation Make Sense in the Least Developed Countries?," Economic Development and Cultural Change, University of Chicago Press, vol. 40(1), pages 1-25, October.
  7. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  8. Solimano, Andres, 1986. "Contractionary devaluation in the southern cone : The case of Chile," Journal of Development Economics, Elsevier, vol. 23(1), pages 135-151, September.
  9. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
  10. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  11. Engle, Robert F., 1982. "A general approach to lagrange multiplier model diagnostics," Journal of Econometrics, Elsevier, vol. 20(1), pages 83-104, October.
  12. Kandil, Magda & Mirzaie, Ida Aghdas, 2003. "The effects of dollar appreciation on sectoral labor market adjustments: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 89-117.
  13. Enrique G. Mendoza, 1992. "The Effects of Macroeconomic Shocks in a Basic Equilibrium Framework," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 855-889, December.
  14. Pagan, Adrian, 1986. "Two Stage and Related Estimators and Their Applications," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 517-38, August.
  15. Joshua E. Greene & Magda E. Kandil, 2002. "The Impact of Cyclical Factors on the U.S. Balance of Payments," IMF Working Papers 02/45, International Monetary Fund.
  16. 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.
  17. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-54, November.
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