Can Currency Real Depreciation Drive Growth?

This paper contributes to the discussion on the real exchange rate and growth relationship by presenting a post-Keynesian structural model for a small open economy. The model’s broader and more disaggregated nature leads to a reduced influence of the real exchange rate, particularly when currency depreciation is gradual and incorporated into economic agents’ behaviour. A robust Marshall-Lerner effect, which offsets the negative impacts of real exchange rate on consumption and investment, along with a considerable share of manufactured goods in production and locally consumed products, is essential for successful real depreciation. In contrast, the absence of such counterbalancing mechanisms could result in output contraction, especially given real wages’ sensitivity to goods market tensions. The real exchange rate is just one of many factors influencing growth. Growth-oriented policies should focus on creating a supportive environment rather than relying solely on currency depreciation, which, without backing, would diminish its effectiveness and lead to adverse outcomes.