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The Effects of Exchange Rate Fluctuations on Output and Prices: Evidence from Developing Countries

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Author Info

  • Magda E. Kandil
  • Ida Aghdas Mirzaie

Abstract

The paper examines the effects of exchange rate fluctuations on real output and the price level in a sample of 33 developing countries. The theoretical model decomposes movements in the exchange rate into anticipated and unanticipated components. Unanticipated currency fluctuations help to determine aggregate demand through exports, imports, and the demand for domestic currency, and aggregate supply through the cost of imported intermediate goods. Anticipated exchange rate depreciation, through the supply channel, has limited effects on output growth and inflation. Unanticipated currency fluctuations appear more significant, with varying effects on output growth and price inflation across developing countries.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/200.

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Length: 32
Date of creation: 01 Oct 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/200

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Related research

Keywords: Real effective exchange rates; Prices; Economic models;

References

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  1. 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.
  2. Hanson, James A., 1983. "Contractionary devaluation, substitution in production and consumption, and the role of the labor market," Journal of International Economics, Elsevier, vol. 14(1-2), pages 179-189, February.
  3. Sebastian Edwards, 1987. "Are Devaluations Contractionary?," NBER Working Papers 1676, National Bureau of Economic Research, Inc.
  4. 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.
  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. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "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?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  7. Guitian, Manuel, 1976. "The effects of changes in the exchange rate on output, prices and the balance of payments," Journal of International Economics, Elsevier, vol. 6(1), pages 65-74, February.
  8. 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.
  9. 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.
  10. 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.
  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. 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.
  13. 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.
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Cited by:
  1. Hussain, Karrar, 2009. "Causal Ordering Between Inflation and Productivity of Labor and Capital: An Empirical Approach for Pakistan," MPRA Paper 16486, University Library of Munich, Germany.
  2. Magda Kandil & Ida Mirzaie, 2006. "Consumption and macroeconomic policies: Theory and evidence from developing countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(4), pages 469-491.

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