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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

Author

Listed:
  • Robert A. Blecker

    () (Department of Economics, American University)

  • Arslan Razmi

    (Department of Economics, University of Massachusetts, Amherst)

Abstract

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.

Suggested Citation

  • Robert A. Blecker & Arslan Razmi, 2007. "The Fallacy of Composition and Contractionary Devaluations: The Output Impact of Real Exchange Rate Shocks in Developing Countries that Export Manufactures," Working Papers 2007-02, American University, Department of Economics.
  • Handle: RePEc:amu:wpaper:0207
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    File URL: http://w.american.edu/cas/economics/repec/amu/workingpapers/2007-02.pdf
    File Function: First version, 2007
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    Citations

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    Cited by:

    1. Sanika Sulochani Ramanayake & Keun Lee, 2016. "Differential impacts of currency undervaluation on growth and exports in natural resource vs. manufacturing exporting countries," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016-023, Indira Gandhi Institute of Development Research, Mumbai, India.
    2. repec:eee:wdevel:v:102:y:2018:i:c:p:90-110 is not listed on IDEAS
    3. repec:eee:rujoec:v:1:y:2015:i:3:p:217-239 is not listed on IDEAS
    4. Lectard, Pauline & Rougier, Eric, 2018. "Can Developing Countries Gain from Defying Comparative Advantage? Distance to Comparative Advantage, Export Diversification and Sophistication, and the Dynamics of Specialization," World Development, Elsevier, vol. 102(C), pages 90-110.

    More about this item

    Keywords

    Real exchange rates; fallacy of composition; terms of trade; manufactured exports; contractionary devaluations; competitive devaluations;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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