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Chronicle of currency collapses: re-examining the effects on output

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  • Matthieu Bussière
  • Sweta c Saxena
  • Camilo Tovar

Abstract

The impact of currency collapses (ie large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (ie ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction; and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, ie one-time events induce exchange rate and output dynamics that differ from consecutive episodes.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 314.

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Length: 51 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:bis:biswps:314

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Keywords: currency crisis; nominal devaluations; nominal depreciations; exchange rates; real output growth; recovery from crises;

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References

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Citations

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Cited by:
  1. Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, Elsevier, vol. 33(C), pages 208-234.
  2. Brei, Michael & Charpe, Matthieu, 2012. "Currency depreciations, financial transfers, and firm heterogeneity," Emerging Markets Review, Elsevier, Elsevier, vol. 13(1), pages 26-41.
  3. Camilo E Tovar, 2010. "Currency collapses and output dynamics: a long-run perspective," BIS Quarterly Review, Bank for International Settlements, June.
  4. Mohammad Karimi & Marcel-Cristian Voia, 2011. "Empirics of Currency Crises: A Duration Analysis Approach," Carleton Economic Papers 11-11, Carleton University, Department of Economics.
  5. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," Discussion Papers 2011/3, Free University Berlin, School of Business & Economics.
  6. Matthieu Bussière & Claude Lopez & Cédric Tille, 2014. "Do Real Exchange Rate Appreciations Matter for Growth?," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 06-2014, Economics Section, The Graduate Institute of International Studies.
  7. Lang, Michael, 2013. "The early warnings of balance-of-payments problems: Kaminsky and Reinhart revisited," Frankfurt School - Working Paper Series 205, Frankfurt School of Finance and Management.
  8. Giuseppe Bertola & John Driffill & Harold James & Hans-Werner Sinn & Jan-Egbert Sturm & Ákos Valentinyi, 2013. "Chapter 2: European Imbalances," EEAG Report on the European Economy, CESifo Group Munich, CESifo Group Munich, vol. 0, pages 55-72, 02.
  9. Cumperayot, Phornchanok & Kouwenberg, Roy, 2013. "Early warning systems for currency crises: A multivariate extreme value approach," Journal of International Money and Finance, Elsevier, Elsevier, vol. 36(C), pages 151-171.

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