IDEAS home Printed from https://ideas.repec.org/p/ums/papers/2005-09.html
   My bibliography  Save this paper

The Contractionary Short-Run Effects of Nominal Devaluation in Developing Countries: Some Neglected Nuances

Author

Listed:
  • Arslan Razmi

    (University of Massachusetts Amherst)

Abstract

This paper extends the model developed by Krugman and Taylor (1978) to take into account interesting features of the evolving structure of global trade. The growing presence of transnational production chains and differential pricing behaviour of exports destined for industrial and developing countries are accommodated. Individual country and panel data pass-through estimates derived from several econometric approaches are provided to justify the latter extension. The likelihood of contractionary short-run effects of devaluations is shown to be positively related to: (1) the proportion of a country's exports destined for other developing countries, and (2) the presence of TNCs in either the export or home goods-producing sector. Unlike the Krugman-Taylor case, devaluation will generally have a contractionary impact even if: (1) trade is initially balanced, (2) consumption behaviour does not differ between wage and profit earners, and (3) the government sector has a high marginal propensity to consume in the short-run. The resulting policy implications underline the need to take into account these increasingly important nuances of international trade while designing exchange rate policies for developing countries. JEL Categories: F12, F14, F23, F41

Suggested Citation

  • Arslan Razmi, 2005. "The Contractionary Short-Run Effects of Nominal Devaluation in Developing Countries: Some Neglected Nuances," UMASS Amherst Economics Working Papers 2005-09, University of Massachusetts Amherst, Department of Economics, revised Sep 2006.
    • Handle: RePEc:ums:papers:2005-09
    as

    Download full text from publisher

    File URL: http://www.umass.edu/economics/publications/2005-09.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Feinberg, Robert M, 2000. "The Role of International Discipline in Three Developing Economies: Exchange Rate Effects on Domestic Prices in Colombia, Korea, and Morocco," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 126-133, February.
    2. Faini, Riccardo & Clavijo, Fernando & Senhadji-Semlali, Abdel, 1992. "The fallacy of composition argument : Is it relevant for LDCs' manufactures exports?," European Economic Review, Elsevier, vol. 36(4), pages 865-882, May.
    3. Carlos F. Diaz Alejandro, 1963. "A Note on the Impact of Devaluation and the Redistributive Effect," Journal of Political Economy, University of Chicago Press, vol. 71, pages 577-577.
    4. Michael M. Knetter, 1992. "Is Price Adjustment Asymmetric?: Evaluating the Market Share and Marketing Bottlenecks Hypothesis," NBER Working Papers 4170, National Bureau of Economic Research, Inc.
    5. Menon, Jayant, 1996. "The Degree and Determinants of Exchange Rate Pass-through: Market Structure, Non-tariff Barriers and Multinational Corporations," Economic Journal, Royal Economic Society, vol. 106(435), pages 434-444, March.
    6. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    7. Menon, Jayant, 1995. "Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
    8. Muscatelli, V. A. & Stevenson, A. A. & Montagna, C., 1994. "Intra-NIE competition in exports of manufactures," Journal of International Economics, Elsevier, vol. 37(1-2), pages 29-47, August.
    9. Robert M. Feinberg, 2000. "The Role of International Discipline in Three Developing Economies: Exchange Rate Effects on Domestic Prices in Colombia, Korea, and Morocco," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 126-133, February.
    10. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 765-783.
    11. 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.
    12. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    13. Jaewoo Lee, 1997. "The Response Of Exchange Rate Pass-Through To Market Concentration In A Small Economy: The Evidence From Korea," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 142-145, February.
    14. Ha-Joon Chang, 1998. "Transnational Corporations and Strategic Industrial Policy," Palgrave Macmillan Books, in: Richard Kozul-Wright & Robert Rowthorn (ed.), Transnational Corporations and the Global Economy, chapter 7, pages 225-243, Palgrave Macmillan.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Baldwin, John R. & Yan, Beiling, 2008. "Domestic and foreign influences on Canadian prices," International Review of Economics & Finance, Elsevier, vol. 17(4), pages 546-557, October.
    2. Peter Rowland, 2003. "Exchange Rate Pass-Through To Domestic Prices: The Case Of Colombia," Borradores de Economia 2683, Banco de la Republica.
    3. Peter Rowland, 2003. "Exchange Rate Pass-Throught to Domestic Prices: The Case of Colombia," Borradores de Economia 254, Banco de la Republica de Colombia.
    4. Martins Bitans, 2004. "Pass-Through of Exchange Rates to Domestic Prices in East European Countries and the Role of Economic Enviroment," Working Papers 2004/04, Latvijas Banka.
    5. Lourdes Martín & Diego Rodríguez, 2004. "Pricing to market at firm level," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(2), pages 302-320, June.
    6. An, Lian & Kim, Gil & Ren, Xiaomei, 2014. "Is devaluation expansionary or contractionary: Evidence based on vector autoregression with sign restrictions," Journal of Asian Economics, Elsevier, vol. 34(C), pages 27-41.
    7. Aliyu, Shehu Usman Rano & Yakub, Ma'aji Umar & Sanni, Ganiyu Kayode & Duke, Omolara, 2009. "Exchange Rate Pass-through in Nigeria: Evidence from a Vector Error Correction Model," MPRA Paper 25053, University Library of Munich, Germany, revised 29 Mar 2010.
    8. Sushanta Mallick & Helena Marques, 2008. "Passthrough of Exchange Rate and Tariffs into Import Prices of India: Currency Depreciation versus Import Liberalization," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 765-782, September.
    9. Pierre-Richard Agénor, 1991. "Output, devaluation and the real exchange rate in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 127(1), pages 18-41, March.
    10. Robert A. Blecker & Arslan Razmi, 2010. "Export-led Growth, Real Exchange Rates and the Fallacy of Composition," Chapters, in: Mark Setterfield (ed.), Handbook of Alternative Theories of Economic Growth, chapter 19, Edward Elgar Publishing.
    11. Brissimis, Sophocles N. & Kosma, Theodora, 2005. "Market power, innovative activity and exchange rate pass-through in the euro area," Working Paper Series 531, European Central Bank.
    12. Joscha Beckmann & Ansgar Belke & Florian Verheyen, 2014. "Exchange rate pass-through into German import prices - a disaggregated perspective," Applied Economics, Taylor & Francis Journals, vol. 46(34), pages 4164-4177, December.
    13. Carlo Gola, 2000. "Export pricing strategy of Italian firms: from the depreciation of the lira to the euro," LIUC Papers in Economics 77, Cattaneo University (LIUC).
    14. Carmen Astrid Romero, 2012. "El efecto transmisión del tipo de cambio en Colombia durante los años de la industrialización," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 30(67), pages 216-251, July.
    15. Mallick, Sushanta & Marques, Helena, 2012. "Pricing to market with trade liberalization: The role of market heterogeneity and product differentiation in India’s exports," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 310-336.
    16. Mr. Luis Ignacio Jácome, 2015. "Central Banking in Latin America: From the Gold Standard to the Golden Years," IMF Working Papers 2015/060, International Monetary Fund.
    17. Clostermann, Jörg, 1996. "Der Einfluß des Wechselkurses auf die deutsche Handelsbilanz," Discussion Paper Series 1: Economic Studies 1996,07, Deutsche Bundesbank.
    18. Hernán Rincón & Édgar Caicedo & Norberto Rodríguez, 2007. "Exchange rate pass-through effects: a disaggregate analysis of Colombian imports of manufactured goods," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 25(54), pages 90-121, June.
    19. Bahmani-Oskooee Mohsen & Mirzaie Aghdas, 2000. "The Long-Run Effects of Depreciation of The Dollar on Sectoral Output," International Economic Journal, Taylor & Francis Journals, vol. 14(3), pages 51-61.
    20. Kamin, Steven B., 1995. "Contractionary devaluation with black markets for foreign exchange," Journal of Policy Modeling, Elsevier, vol. 17(1), pages 39-57, February.

    More about this item

    Keywords

    Differential pass-through elasticities; contractionary devaluations; transnational corporations; error correction models; autoregressive distributed lag models; structuralist models.;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ums:papers:2005-09. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Daniele Girardi (email available below). General contact details of provider: https://edirc.repec.org/data/deumaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.