IDEAS home Printed from https://ideas.repec.org/p/hnb/wpaper/4.html
   My bibliography  Save this paper

Exchange Rate and Output in the Aftermath of the Great Depression and During the Transition Period in Central Europe

Author

Listed:
  • Velimir Šonje

Abstract

The author compares the influence of the exchange rate on economic activity during two distinct historical episodes: the aftermath of the Great Depression and the second stage of transition in Central Europe (1994–1998). The main hypothesis is that benefits from devaluation may actually be derived from the coordination of international economic policy. This is an important distinction because benefits from devaluation lead to the policy prescription “if all devalue, everybody is better off,” while benefits from coordination lead to a much more carefully implemented exchange rate policy. The author finds that large devaluations/depreciations in transition countries always seem to be detrimental to growth, while small fluctuations in the exchange rate seem to support various output scenarios, depending on the initial conditions and/or the speed of market reforms (where the latter depend on the former) and historical circumstances (such as membership in the FSU). Where seeming benefits from devaluation did appear, they may have occurred simply because some small and open economies had successfully coordinated their monetary policies with their main trading and financial partners. Many of the “benefits” from devaluation in the aftermath of the Great Depression can be attributed to the successful coordination between the Scandinavian countries and their main trading partner – Great Britain. From a comparison of two very distinct historical episodes, the author concludes that devaluation is not a good strategy for an individual country and the approach “if all devalue, everyone is better off” cannot automatically be established as a policy prescription. In many cases, the costs of devaluation may exceed the benefits. The results in this paper point beyond the usual economists’ credo that no single currency regime is right for all countries at all times. The results indicate that the international propagation mechanisms and the issues of international economic policy coordination are crucial in determining the impact of devaluation.

Suggested Citation

  • Velimir Šonje, 2000. "Exchange Rate and Output in the Aftermath of the Great Depression and During the Transition Period in Central Europe," Working Papers 4, The Croatian National Bank, Croatia.
  • Handle: RePEc:hnb:wpaper:4
    as

    Download full text from publisher

    File URL: http://www.hnb.hr/repec/hnb/wpaper/pdf/w-004.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ricardo Hausmann & Michael Gavin & Carmen Pagés-Serra & Ernesto H. Stein, 1999. "Financial Turmoil and Choice of Exchange Rate Regime," Research Department Publications 4170, Inter-American Development Bank, Research Department.
    2. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
    3. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 869-903.
    4. Maurice Obstfeld & Alan M. Taylor, 1998. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 353-402, National Bureau of Economic Research, Inc.
    5. Eichengreen, Barry & Sachs, Jeffrey, 1985. "Exchange Rates and Economic Recovery in the 1930s," The Journal of Economic History, Cambridge University Press, vol. 45(4), pages 925-946, December.
    6. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, June.
    7. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    8. Ricardo Hausmann & Michael Gavin & Carmen Pagés & Ernesto H. Stein, 1999. "Financial Turmoil and the Choice of Exchange Rate Regime," IDB Publications (Working Papers) 4128, Inter-American Development Bank.
    9. Gerardo della Paolera & Alan M. Taylor, 1997. "Finance and Development in an Emerging Market: Argentina and the Interwar Period," NBER Working Papers 6236, National Bureau of Economic Research, Inc.
    10. repec:hoo:wpaper:e-98-2 is not listed on IDEAS
    11. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    12. Paolera, Gerardo Della & Taylor, Alan M., 1999. "Economic Recovery from the Argentine Great Depression: Institutions, Expectations, and the Change of Macroeconomic Regime," The Journal of Economic History, Cambridge University Press, vol. 59(3), pages 567-599, September.
    13. Michael Bordo & Anna Schwartz, 1996. "Why clashes between internal and external stability goals end in currency crises, 1797–1994," Open Economies Review, Springer, vol. 7(1), pages 437-468, March.
    14. Alan M. Taylor, 1996. "International Capital Mobility in History: Purchasing-Power Parity in the Long Run," NBER Working Papers 5742, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mladen Vedriš, 2015. "Razlozi, mogucnosti i sposobnosti za promjene u ekonomskoj politici u RH," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 89-114.
    2. repec:eff:ekoeco:v:22:y:2015:i:1:p:115-137 is not listed on IDEAS
    3. Nikša Grgurevic, 2015. "Uzroci i posljedice reprodukovanja institucionalnog vakuuma u državama Jugoistocne Evrope," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 231-243.
    4. Damir Novotny, 2015. "Fiskalna politika i kriza hrvatskog gospodarstva - u potrazi za rješenjima-," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 1-22.
    5. Zvonimir Savic, 2015. "EU fondovi i Junckerov program kao poticajni alati investicija i ukupnog gospodarskog razvoja," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 53-74.
    6. Mirjana cizmovic & Jelena Jankovic & Milenko Popovic, 2015. "Growth Anatomy of Croatian Economy," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 159-216.
    7. repec:eff:ekoeco:v:11:y:2005:i:3:p:392-424 is not listed on IDEAS
    8. Guste Santini, 2015. "Porez na dodanu vrijednost - porez buducnostic," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 23-52.
    9. Neven Vidakovic & Dubravko Radoševic, 2015. "Kretanje kapitala u Hrvatskoj 2009. - 2015. - Opcije za izbor novog ekonomskog modela Hrvatske -," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 115-134.
    10. Mimo Draškovic & Lakic Slobodan & Veselin Draškovic, 2015. "Kljucni problemi Crne Gore na putu pridruživanja EU," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 217-230.
    11. Dragoljub Stojanov, 2015. "The Scope, Challenges and Perspective of Croatian Development Policy in the Context of the EU Destiny," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 75-88.
    12. Sofija Adžic, 2015. "Zaokret iz recesije ka ekonomskom razvoju sa novim tokom reindustrijalizacije u regionu," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 135-158.

    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. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, vol. 54(5), pages 659-677, July.
    2. Guillermo Ortiz, 2000. "How should monetary policymakers react to the new challenges of global economic integration: commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 255-276.
    3. Taguchi, Hiroyuki, 2011. "Monetary autonomy in emerging market economies: The role of foreign reserves," Emerging Markets Review, Elsevier, vol. 12(4), pages 371-388.
    4. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2003. "Exchange Rate Regimes: Choices and Consequences," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072408, February.
    5. Jane Sneddon Little & Giovanni P. Olivei, 1999. "Why the interest in reforming the International Monetary System?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 53-84.
    6. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
    7. Taguchi, Hiroyuki & Nataraj, Geethanjali & Sahoo, Pravakar, 2011. "Monetary autonomy in selected Asian economies: The role of international reserves," Journal of Asian Economics, Elsevier, vol. 22(6), pages 471-482.
    8. Joshua Aizenman & Ricardo Hausmann, 2000. "Exchange Rate Regimes and Financial-Market Imperfections," NBER Working Papers 7738, National Bureau of Economic Research, Inc.
    9. Carlos da Silva & Matías Vernengo, 2008. "The Decline of the Exchange Rate Pass-Through in Brazil: Explaining the "Fear of Floating"," International Journal of Political Economy, Taylor & Francis Journals, vol. 37(4), pages 64-79.
    10. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    11. De la Torre, Augusto & Schmukler, Sergio, 2011. "Emerging Capital Markets and Globalization: The Latin American Experience," IDB Publications (Books), Inter-American Development Bank, number 349, October.
    12. Tatiana Didier & Sergio L Schmukler, 2014. "Debt Markets in Emerging Economies: Major Trends," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(2), pages 200-228, June.
    13. Esteban Jadresic & Paul R. Masson & Paolo Mauro, 2019. "Exchange Rate Regimes of Developing Countries: Global Context and Individual Choices," World Scientific Book Chapters, in: Macroeconomic Modelling and Monetary and Exchange Rate Regimes, chapter 5, pages 143-193, World Scientific Publishing Co. Pte. Ltd..
    14. Barry Eichengreen and Carlos Arteta., 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research (CIDER) Working Papers C00-115, University of California at Berkeley.
    15. Nicholas Crafts & Peter Fearon, 2010. "Lessons from the 1930s Great Depression," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 285-317, Autumn.
    16. Michael D. Bordo & Marc Flandreau, 2003. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Chapters, in: Globalization in Historical Perspective, pages 417-472, National Bureau of Economic Research, Inc.
    17. Yin-Wong Cheung & Dickson C. Tam & Matthew S. Yiu, 2008. "Does the Chinese interest rate follow the US interest rate?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 53-67.
    18. Domac, Ilker & Martinez Peria, Maria Soledad, 2003. "Banking crises and exchange rate regimes: is there a link?," Journal of International Economics, Elsevier, vol. 61(1), pages 41-72, October.
    19. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    20. Patnaik, Ila & Shah, Ajay & Sethy, Anmol & Balasubramaniam, Vimal, 2011. "The exchange rate regime in Asia: From crisis to crisis," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 32-43, January.

    More about this item

    Keywords

    Exchange Rate; Output; International Propagation of Shocks; Great Depression; Transition;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

    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:hnb:wpaper:4. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.hnb.hr .

    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: Romana Sinković (email available below). General contact details of provider: https://www.hnb.hr .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.