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The Fallacy of Composition and Contractionary Devaluations: The Output Impact of Real Exchange Rate Shocks in Developing Countries that Export Manufactures

Listed author(s):
  • Robert A. Blecker


    (Department of Economics, American University)

  • Arslan Razmi

    (Department of Economics, University of Massachusetts, Amherst)

This paper studies whether intra-developing country price competition has significant effects on the short-run growth of output in developing countries that are specialized in manufactured exports. Regression estimates using the generalized method of moments (GMM) applied to annual panel data for 17 developing countries in 1983-2004 show that these countries exhibit a ‘fallacy of composition’, in the sense that a real depreciation relative to competing developing country exporters increases the home country’s growth rate in the short run. The results also suggest that real depreciations for these developing countries relative to the industrialised countries are contractionary.

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File Function: First version, 2007
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Paper provided by American University, Department of Economics in its series Working Papers with number 2007-02.

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Length: 45 pages
Date of creation: Jan 2007
Handle: RePEc:amu:wpaper:0207
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