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Some multi-country evidence on the effects of real exchange rates on output

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  • Steven B. Kamin

    (U.S. Board of Governors of the Federal Reserve - Division of International Finance (IFDP))

  • Marc Klau
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    Abstract

    A considerable amount of theoretical literature suggests that, contrary to the predictions of textbook analysis, exchange rate devaluations may be contractionary rather than expansionary. This hypothesis has also received considerable empirical support. However, prior statistical analyses of the effects of exchange rate devaluation on output have been subject to several limitations: (i) they have failed to distinguish adequately between short and long-run effects; (ii) they have not controlled for the full range of external shocks; and (iii) they have not considered whether the effects of devaluation might differ between different regions of the world. The purpose of this paper is to estimate the impact of devaluation on output for 27 countries while attempting to address these limitations in previous empirical analyses. We find no evidence that devaluations are contractionary in the long run. Additionally, controlling for sources of spurious correlation and reverse causality appears to mute the measured contractionary effect of devaluation in the short run, although evidence that this effect exists remains even after these controls are introduced. Finally, no significant differences among the regions stand out; in fact, while the literature on contractionary devaluation has focused primarily on developing countries, we found no evidence that this effect is stronger in developing countries than in industrialised countries.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 48.

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    Length: 23 pages
    Date of creation: Sep 1997
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    Handle: RePEc:bis:biswps:48

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    1. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany.
    2. 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.
    3. P. Krugman & L. Taylor, 1976. "Contractionary Effects of Devaluations," Working papers 191, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Jorge E. Roldós, 1995. "Supply-Side Effects of Disinflation Programs," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 158-183, March.
    5. 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.
    6. 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.
    7. Pierre-Richard Agénor, 1991. "Output, devaluation and the real exchange rate in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 127(1), pages 18-41, March.
    8. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate," MPRA Paper 13765, University Library of Munich, Germany.
    9. 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.
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    Cited by:
    1. David Fernando López Angarita, 2006. "Nivel de reservas internacionales y riesgo cambiario en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 8(15), pages 117-159, July-Dece.
    2. Mario Sarcinelli, 2006. "Tassi di cambio fluttuanti, deprezzamento valutario e domanda effettiva: un commento," Moneta e Credito, Economia civile, vol. 59(236), pages 405-412.
    3. Julio López & Ignacio Perrotini, 2006. "Tassi di cambio fluttuanti, deprezzamento valutario e domanda effettiva," Moneta e Credito, Economia civile, vol. 59(235), pages 233-256.
    4. Ansgar Belke & Daniel Gros, 1999. "Estimating the costs and benefits of EMU: The impact of external shocks on labour markets," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 1-47, March.
    5. Rageh, Rania, 2010. "Interest rate rule for the conduct of monetary policy: analysis for Egypt (1997:2007)," MPRA Paper 26639, University Library of Munich, Germany.
    6. Ansgar Belke & Daniel Gros, 2001. "Real Impacts of Intra-European Exchange Rate Variability: A Case for EMU?," Open Economies Review, Springer, vol. 12(3), pages 231-264, July.
    7. Müller, Claudia & Buscher, Herbert S., 1999. "The impact of monetary instruments on shock absorption in EU-Countries," ZEW Discussion Papers 99-15, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. Julio Lopez & Ignocio Perrotini Perrotini, 2006. "On floating exchange rates, currency depreciation and effective demand," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 221-242.
    9. Mario Sarcinelli, 2006. "On floating exchange rates, currency depreciation and effective demand: a comment," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(239), pages 389-395.
    10. Antonia López Villavicencio & Josep Lluís Raymond Bara, 2006. "The short and long-run determinants of the real exchange rate in Mexico," Working Papers wpdea0606, Department of Applied Economics at Universitat Autonoma of Barcelona.
    11. Julio Lopez & Ignocio Perrotini Perrotini, 2006. "On floating exchange rates, currency depreciation and effective demand," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 221-242.
    12. Mario Sarcinelli, 2006. "On floating exchange rates, currency depreciation and effective demand: a comment," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(239), pages 389-395.
    13. Chantal Dupasquier & Patrick N. Osakwe & Shandre M. Thangavelu, 2005. "Choice of Monetary and Exchange Regimes in ECOWAS: An Optimum Currency Area Analysis," SCAPE Policy Research Working Paper Series 0510, National University of Singapore, Department of Economics, SCAPE.

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