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Are devaluations contractionary in MENA countries?

Author

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  • Mohsen Bahmani-Oskooee
  • Magda Kandil

Abstract

Currency depreciation reduces aggregate supply by raising cost of imported inputs and increases aggregate demand by increasing its net export component. Depending on the relative strength of the two effects, depreciation could be expansionary or contractionary. We employ the bounds testing approach to cointegration and error-correction modelling to evaluate the effects of exchange rate depreciation on output growth, both in the short and in the long-run, across a sample of MENA countries. Exchange rate fluctuations are found to be important to fluctuations in real output growth in the short-run. Anticipated exchange rate depreciation may induce long-run expansionary or contractionary effects on output supply. Consistent with theory's predictions, the expansionary effect of unanticipated depreciation is only transitory on output growth. Nonetheless, unanticipated depreciation is found to have a contractionary effect on output growth in the long-run via an increase in the cost of imported inputs.

Suggested Citation

  • Mohsen Bahmani-Oskooee & Magda Kandil, 2009. "Are devaluations contractionary in MENA countries?," Applied Economics, Taylor & Francis Journals, vol. 41(2), pages 139-150.
  • Handle: RePEc:taf:applec:v:41:y:2009:i:2:p:139-150
    DOI: 10.1080/00036840600994195
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    Citations

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    Cited by:

    1. Abdallah, Ali, 2022. "Dépréciation réelle de la monnaie et croissance économique [Can real currency depreciation lead growth?]," MPRA Paper 113183, University Library of Munich, Germany.
    2. 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.
    3. Mohsen Bahmani-Oskooee & Amirhossein Mohammadian, 2018. "Asymmetry Effects of Exchange Rate Changes on Domestic Production in Emerging Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(6), pages 1442-1459, May.
    4. Manuel CANTAVELLA-JORDA & Sheila Amin GUTIERREZ DE PIÑERES, 2012. "A Cross-national Panel Study of Devaluations on Disaggregated Export Sectors: A Case for Sector Specific Policies," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 12(2).
    5. Mohsen Bahmani-Oskooee & Augustine C. Arize, 2020. "Asymmetric response of domestic production to exchange rate changes: evidence from Africa," Economic Change and Restructuring, Springer, vol. 53(1), pages 1-24, February.
    6. Akbar, Muhammad & Ahmad, Eatzaz, 2021. "Repercussions of exchange rate depreciation on the economy of Pakistan: Simulation analysis using macroeconometric model," Journal of Policy Modeling, Elsevier, vol. 43(3), pages 574-600.
    7. Lian An & Xiaomei Ren & Huimin Li & Jing Xu, 2017. "Exchange Rate And Us Macroeconomy: Evidence From The Factor-Augmented Vector Autoregressive Model," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(02), pages 483-508, June.
    8. Azzouzi, asmae & Bousselhamia, Ahmed, 2019. "Impact Des Variations Du Taux De Change Reel Sur L'Economie Marocaine : Une Approche Svar A Des Restrictions De Signes [Impact Of Real Exchange Rate Variations On The Moroccan Economy: A Svar Appro," MPRA Paper 110397, University Library of Munich, Germany.
    9. Mohsen Bahmani-Oskooee & Ferda Halicioglu & Amirhossein Mohammadian, 2018. "On the asymmetric effects of exchange rate changes on domestic production in Turkey," Economic Change and Restructuring, Springer, vol. 51(2), pages 97-112, May.
    10. Suleman Ghaffar & Humaira Munir & Shahbaz Nawaz & Anam Javaid, 2019. "The Impact of International Trade on Economic Growth: A Case Study of Pakistan," Asian Journal of Social Sciences and Management Studies, Asian Online Journal Publishing Group, vol. 6(2), pages 15-22.
    11. Muhammad Shahbaz & Faridul Islam & Naveed Aamir, 2012. "Is devaluation contractionary? Empirical evidence for Pakistan," Economic Change and Restructuring, Springer, vol. 45(4), pages 299-316, November.
    12. Sweidan Osama D., 2013. "Exchange Rate Pass-Through into Import Prices in Jordan," Global Economy Journal, De Gruyter, vol. 13(1), pages 109-128, January.
    13. Boubellouta Bilal & Muhammad Shahbaz, 2021. "Comparing the Relationship Between Nominal and Real Effective Exchange Rates During the Last Two Devaluations in Algeria," Global Business Review, International Management Institute, vol. 22(6), pages 1421-1440, December.
    14. Mohsen Bahmani-Oskooee & Amirhossein Mohammadian, 2016. "Asymmetry Effects of Exchange Rate Changes on Domestic Production: Evidence from Nonlinear ARDL Approach," Australian Economic Papers, Wiley Blackwell, vol. 55(3), pages 181-191, September.

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