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Does Devaluation Cause Stagflation?
Abstract
Presents a simple macro-economic model in which devaluation influences real income and output both through the cost of imported inputs on the supply side of the economy and through exports, imports, and expenditures on the demand side. Statistical estimates of the structural parameters of the model for a group of ten industrial and developing countries are used to show that the demand effects dominate the cost effects in most cases, thus supporting the traditional view that devaluation has positive real effects in these countries in the short to medium run.-Authors
... Empirical time-series evidence on the impact of currency changes on domestic output is inconclusive. While some studies found an expansionary output effect for currency devaluation/depreciation (Bahmani-Oskooee and Rhee, 1997; Gylfason and Schmid, 1983;Ratha, 2010), other studies found devaluation/depreciation contractionary Shahbaz et al., 2012) and a third group of studies found a neutral effect for currency changes on domestic output (Ayen, 2014;Bahmani-Oskooee, 1998;Upadhyaya and Upadhyay, 1999). For example (Gylfason and Schmid, 1983) presented a basic macroeconomic model wherein devaluation affects real income and production via the supply side's cost of imported inputs Impact of exchange rate on Egyptian output and the demand side's exports, imports and expenditures. ...
... While some studies found an expansionary output effect for currency devaluation/depreciation (Bahmani-Oskooee and Rhee, 1997; Gylfason and Schmid, 1983;Ratha, 2010), other studies found devaluation/depreciation contractionary Shahbaz et al., 2012) and a third group of studies found a neutral effect for currency changes on domestic output (Ayen, 2014;Bahmani-Oskooee, 1998;Upadhyaya and Upadhyay, 1999). For example (Gylfason and Schmid, 1983) presented a basic macroeconomic model wherein devaluation affects real income and production via the supply side's cost of imported inputs Impact of exchange rate on Egyptian output and the demand side's exports, imports and expenditures. They focused on ten industrial and developing countries and found that in most cases, demand impacts outweigh cost effects, confirming the traditional view that devaluation has positive real effects in these nations. ...
Purpose
This paper investigates the asymmetric impact of the real effective exchange rate (REER) on Egypt's real domestic output from 1960 to 2020.
Design/methodology/approach
A Nonlinear Autoregressive Distributed Lag (NARDL) model is utilized to isolate real currency depreciations from appreciations and account for the potential asymmetry in the impact of the REER. The analyses account for the various channels via which the REER could affect domestic output.
Findings
Results show evidence of a long-run asymmetry in the output effect of REER changes in which only real currency depreciations have a contractionary impact on output, while the REER has no impact on output in the short run.
Practical implications
The Egyptian monetary authority cannot rely on domestic currency depreciation as a policy instrument to boost domestic output.
Originality/value
Unlike most of the previous studies, which assume linearity in the impact of the REER on output, we relax this assumption and hypothesize that the REER changes have an asymmetric effect on the Egyptian domestic output in Egypt. We use a long time span from 1960 to 2020 and control for the potential structural breaks in the REER-output nexus and the various channels through which the REER can affect domestic output.
... Ayen (2014) [8] found that currency depreciation had a negative effect on output growth in the long-run in Ethiopia. Gylfason and Schmid (1983) [32]. The results showed that devaluation had expansionary effects in all five countries except Brazil and United Kingdom. ...
... Ayen (2014) [8] found that currency depreciation had a negative effect on output growth in the long-run in Ethiopia. Gylfason and Schmid (1983) [32]. The results showed that devaluation had expansionary effects in all five countries except Brazil and United Kingdom. ...
This study estimates the impact of public financial management on economic growth of an African developing country Ghana. In financial management particularly government expenditures, government revenue and exchange rate are under investigation to link with DGP growth. For this purpose, time series data of given
variables is taken from the period of 2000 to 2019. OLS technique is applied to estimate and check the impact of independent variables government expenditures, government revenues and exchange rate on dependent GDP growth. Furthermore, in regression analysis the results from the ADF unit root test provide evidence to show that both the public financial management and the economic development proxies are integrated of order one and require first differencing to achieve stationarity. The estimation shows that there is a significant positive relation of government expenditures, government revenues and exchange rate on GDP growth in Ghana. The study recommends role of government and its institutes should play their role because it will be affecting the economy of Ghana positively.
... Empirical time-series evidence on the impact of currency changes on domestic output is inconclusive. While some studies found an expansionary output effect for currency devaluation/depreciation (Bahmani-Oskooee & Rhee, 1997; Gylfason & Schmid, 1983;Ratha, 2010), other studies found devaluation/depreciation contractionary Shahbaz et al., 2012), and a third group of studies found a neutral effect for currency changes on domestic output (Ayen, 2014;Bahmani-Oskooee, 1998;Upadhyaya & Upadhyay, 1999). ...
... For example (Gylfason & Schmid, 1983) presented a basic macroeconomic model wherein devaluation affects real income and production via the supply side's cost of imported inputs and the demand side's exports, imports, and expenditures. They focused on ten industrial and developing countries and found that in most cases, demand impacts outweigh cost effects, confirming the traditional view that devaluation has positive real effects in these nations. ...
The Egyptian pound has undergone substantial devaluations over the past five years. The Central Bank of Egypt aimed through these currency devaluations to stimulate domestic output. In this paper, we investigate the asymmetric impact of the real effective exchange rate (REER) on Egypt's real domestic output from 1960 to 2020 using a Nonlinear Autoregressive Distributed Lag (NARDL) model. The analyses account for the various channels via which the REER would affect domestic output. Results show evidence of a long-run asymmetry in the output effect of REER changes in which only real currency depreciations have a contractionary impact on output, while the REER has no impact on output in the short run. The Egyptian monetary authority cannot rely on domestic currency depreciation as a policy instrument to boost domestic output.
... Inflation, the real exchange rate 1 and economic growth are three major macroeconomic indicators which represent the economic health of a nation. Relationships among these variables have drawn considerable research interest in developing countries, particularly since the 1980s but going back much earlier (Somen, 1958;Solimano, 1986;Gylfason & Schmid, 1983). In the development and trade literatures, the real exchange rate did not feature prominently until developing countries generally began undertaking trade liberalization and financial reform in the 1980s as they implemented the export-oriented development strategy (Eichengreen, 2007(Eichengreen, ,2008) whose success had been demonstrated, first by Japan, and then again by the four so 'Asian Tigers' 2 . ...
... Over time, however, real-exchange-rate behaviour in most East Asian countries changed as they shifted to the export-oriented industrialization strategy despite their earlier predilection for import-substituting development. 16 Some early studies include Diaz-Alejandro (1963, Krugman and Taylor (1978), Gylfason & Schmid (1983) and Domac (1997). ...
This paper uses annual data for the period 1970-2010 to conduct cointegration testing, then selects the data to a shorter period, 1980-2010, to obtain a balanced panel-data analysis. The paper investigates the triangular relationships among inflation, the real exchange rate and economic growth in 14 countries of the Asia-Pacific. It formulates two testable hypotheses for empirical investigation within a cointegration and error-correction modelling framework. The first hypothesis is that inflation and the real exchange rate have no 'cointegral relationship' although they may have a short-run causal relation especially under a real-exchange-rate targeting strategy of monetary policy. The second hypothesis is that real output and the real exchange rate may have a steady-state relation but it is not cointegral, in the sense of having causality running in at least one direction; any causality between real output (or its growth) and the real exchange rate is short-term or episodic in nature. The paper deploys two approaches ⎯ the Johansen approach and the ARDL bounds-test approach ⎯ to test for cointegral relations among inflation, the real exchange rate and real output. The test results for individual countries suggest weak cointegral relation between inflation and the real exchange rate while rejecting the presence of such a relation between real output and the real exchange rate. The Granger-causality tests, conducted within the VAR and VEC modelling frameworks, also suggest the presence of weak causality among inflation, the real exchange rate and real output. The results obtained from the panel data, however, suggest stronger causal relations among these variables. Further analysis deploying a SVAR model with panel data suggest that a real currency-appreciation raises inflation by lowering output. The results obtained by the error-correction models, however, do not suggest any significant impact of real appreciation on either output or inflation for most individual countries in the sample. Based on such varied results, the paper draws some policy implications in the context of the present debate on the economic-development policy of maintaining an undervalued real-exchange-rate as a strategy for promoting economic growth
... Introduction Inflation, the real exchange rate 1 and economic growth are three of the major macroeconomic indicators representing the economic health of a nation. Relationships among these variables have drawn considerable research interest in developing countries, particularly since the 1980s but going back much earlier (Somen, 1958;Solimano, 1986;Gylfason and Schmid, 1983). In the development and trade literatures, the real exchange rate did not feature prominently until developing countries generally began undertaking trade liberalization and financial reform in the 1980s as they implemented the exportoriented development strategy (Eichengreen, 2007(Eichengreen, ,2008, whose success had already been demonstrated by Japan from the 1960s, followed in the 1980s by the four so-called 'Asian Tigers'. 2 Meanwhile, in the context of the high-inflationary countries of Latin America, the role of the real exchange rate was debated within the older import-substituting strategy of development (Sinohara, 1983). ...
... Over time, however, realexchange-rate behaviour in most East Asian countries changed as they shifted to the export-oriented industrialization strategy despite their earlier predilection for import-substituting development. 16 Some early studies include Diaz-Alejandro (1963, Krugman and Taylor (1978), Gylfason and Schmid (1983) and Domac (1997). 17 The World Bank and the IMF consider devaluation an effective instrument for expanding output. ...
This paper uses annual data for the period 1970-2010 to conduct cointegration testing, then selects the data to a shorter period, 1980-2010, to obtain a balanced panel-data analysis. The paper investigates the triangular relationships among inflation, the real exchange rate and economic growth across 14 countries of the Asia-Pacific. It formulates two testable hypotheses for empirical investigation within a cointegration and error-correction modelling framework. The first hypothesis is that inflation and the real exchange rate have no 'cointegral relationship' although they may have a short-run causal relation, especially under a real-exchange-rate-targeting strategy of monetary policy. The second hypothesis is that real output and the real exchange rate may have a steady-state relation that is not cointegral, in the sense of having causality running in at least one direction; any causality between real output (or its growth) and the real exchange rate is short-term or episodic in nature. The paper deploys the Johansen and the ARDL bounds-test approaches to test for cointegration among inflation, the real exchange rate and real output. The test results for individual countries suggest weak cointegration between inflation and the real exchange rate while failing to reject the null hypothesis of no cointegration between real output and the real exchange rate. The Granger-causality tests, conducted within the VAR and VEC modelling frameworks, suggest the presence of weak causality among inflation, the real exchange rate and real output, a finding strongly supported by the panel data at a higher level of causality. Further analysis deploying a SVAR model with panel data suggest that a real currency appreciation raises inflation by lowering output. The results obtained by the error-correction models, however, do not suggest any significant impact of a real appreciation on either output or inflation for most individual countries in the sample. Based on such varied results, the paper draws some policy implications in the context of the present debate on the economic-development policy of maintaining an undervalued real exchange rate as a strategy for promoting economic growth.
... Gylfason and Risager (1984)'s work predates these models and endogenizes fiscal spending as a negative function of external liabilities, so that a devaluation produces austerity effects. Moreover, models within the monetarist framework contend that devaluations reduce real cash balances, increase the rate of interest and contract real output (Islam 1984;Gylfason and Schmid 1983;Guitian 1976). Finally, recent empirical work by Worrell et al. (2018) show that the contractionary effects of devaluations are more likely for economies with highly concentrated export baskets and population sizes of 1.2 million or less. ...
... For example, several scholars have formalized the contractionary effects when an economy depends on imported capital goods. The works of Buffie (1986), Branson (1986) and Gylfason and Schmid (1983) emphasize the cost channel associated imported capital, while the works of Ribeiro et al. (2017a), Lopez andPerrotini (2006), Taylor (2004) and Bhaduri and Marglin (1990) delineate the distribution channel. In other words, the latter scholarship argues that firms' mark-up rises as the cost of imported capital increases and in turn contracts the wage share, which produces contractionary effects. ...
This thesis contains four chapters. In the first chapter, I provide a structured survey of balance of payments (BP) constrained growth models. Unlike other surveys, this chapter reviews the various mechanisms of relative price adjustments, undertakes a comprehensive review of capital flows and surveys the literature on endogenous trade elasticities. The second chapter contributes to the literature on technological gaps and BP constrained growth by developing a theoretical framework to account for the ambiguous effects of capital inflows on short and medium-run growth. The model shows that when a technological gap exists between two countries in an Economic and Monetary Union (EMU) and it exceeds a critical threshold, capital flows toward the technological laggard deteriorate its production structure and reduce its BP constrained growth rate. Several conclusions are derived. The size of the technological gap and demand-regimes are consequential for relative economic performance and regional cohesion. Capital flows within a community can produce both convergence and divergence effects. Finally, if political consensus is lacking at the regional level as to the design framework for a Fiscal Union, then the principal convergence criteria must include demand regimes and the size of the technological gap. The third chapter endogenizes the trade elasticities as an ambiguous function of the wage share but a positive function of the inverted technological gap. When the laggard economy has a small capital goods producing sector, high inequality and conspicuous consumption, a tradeoff emerges between distribution and technological convergence. However, the tradeoff becomes less binding if an EMU provides for investments in technological innovation and emulation that assist the catching-up process. The fourth chapter incorporates the monetary economy into a three-incomes post-Kaleckian model. It demonstrates how a devaluation can induce contractionary effects by lowering the profit share and raising the loan rate. These results are driven by oligopolistic bankers who exercise market power in the bond and loan markets. Moreover, the chapter demonstrates that monetary policy increases bankers’ rent share, which lowers the rate of firm-level innovation. These results imply that the effects of a devaluation depend on the degree of competition in the banking sector, the size of banks’ foreign assets- and loan-capital ratios and whether or not the economy is in a regime of excess reserves.
... Krugman (1989) asserts that productivity undervaluation enhances economic growth, but the interest in establishing links between undervaluation and economic growth dates back even further. Gylfason and Schmid (1983) a general equilibrium model and found that devaluation positively influences real GDP by supply channels, along the same lines as Taylor and Rosensweig (1984). Despite the extensive literature on the links between undervaluation and economic growth, results have been mixed. ...
This study analyzes the dynamic effects of undervaluation on the economic growth per capita of Latin American countries from 1980 to 2018. To estimate these effects, a panel vector autoregressive (PVAR) model was used with the System GMM as its estimator. The undervaluation variable is created from different measures of real exchange rates. In addition, various measures of GDP per capita were used to calculate economic growth per capita. Macroeconomic and human capital variables were included to control for the different undervaluation spread channels on economic growth per capita. Results show a positive effect depending on the definition of the real exchange rate used to calculate the undervaluation. Results also include the Granger causality test, a stability test, and impulse response graphs that project the response of per capita economic growth to an undervaluation shock.
KEYWORDS:
Real exchange rate; undervaluation; panel VAR; developing countries
... Several researchers have documented the correlation between exchange-rate fluctuations and economic growth. Prior studies involve Connolly (1983), Gylfason and Schmid (1983), and Kamin and Klau (1998), who predominantly observed that depreciation led to expansionary growth. Subsequent research, however, offered evidence for the contractionary impact of devaluation on the development (Gylfason and Radetzki, 1985;Berument and Pasaogullari, 2003; El-Ramly and Abdel-Haleim, 2008; Odusola and Akinlo, 2001). ...
This article gives empirical evidence that the real exchange rate can significantly affect sustainable productivity growth, which confirms the hypothesis that the effect critically depends on the degree of the economy's financial development. Following the relatively underdeveloped financial system in Nigeria, its exchange rate reduces the productivity growth of the economy. In this article, we consider the interacting effect of exchange rate fluctuation and the level of financial development instead of analyzing the exchange rate fluctuation in isolation. The empirical estimation is based on Nigerian data set covering the years 1980-2019; through the application of threshold autoregressive non-linear co-integration and the non-linear ARDL estimation. We further deploy a test of causality using the frequency domain that enables us to differentiate a temporal as well as a permanent causality. The findings appear that financial development amplifies the positive effects of the real exchange rate on Nigeria's economic growth. It also records that the uncertainty in foreign capital flows adversely affects Nigeria's output growth. The paper recommends that Nigerian policymakers should in their attempt to diversify and improve the future growth of the economy, promote adequate financial sector development since financial shocks are amplified with poorly implemented credit markets.
... The central bank counteracted and imposed capital controls by doubling its benchmark interest rates to control currency depreciation and hyperinflation (Verma, 2022). Empirically, currency devaluation in developing countries has a contractionary effect in the short run and an expansionary impact in the long run (Connolly, 1983;Gylfason & Risager, 1984;Gylfason & Schmid, 1983). However, ruble devaluation will have a neutral effect on Russian exports. ...
This paper intends to establish conceptual foundations for analyzing the economic dimensions of a territorial military conflict. The Intraregional Trade Disruption from War Simulator (ITDW-Simulator) attempts to estimate the heterogeneous macroeconomic effects of the military conflict. The model suggests two primary indicators and four secondary indicators. The final trade suffocation index (TS-Index) and the final investment desgrowth from war function (w) measure trade disruption's potential impact on international trade patterns and economic development. The agriculture exports, industrial and manufacturing exports, service exports, and FDI flows capture the trade and investment interdependency. The model investigates the impact of the Russo-Ukraine military conflict on the bilateral trade and investment between the Russian Federation and the European Union.
... The central bank counteracted and imposed capital controls by doubling its benchmark interest rates to control currency depreciation and hyperinflation (Verma, 2022). Empirically, currency devaluation in developing countries has a contractionary effect in the short run and an expansionary impact in the long run (Connolly, 1983;Gylfason & Risager, 1984;Gylfason & Schmid, 1983). However, ruble devaluation will have a neutral effect on Russian exports. ...
This paper intends to establish conceptual foundations for analyzing the economic dimensions of a territorial military conflict. The Intraregional Trade Disruption from War Simulator (ITDW-Simulator) attempts to estimate the heterogeneous macroeconomic effects of the military conflict. The model suggests two primary indicators and four secondary indicators. The final trade suffocation index (TS-Index) and the final investment desgrowth from war function (w) measure trade disruption's potential impact on international trade patterns and economic development. The agriculture exports, industrial and manufacturing exports, service exports, and FDI flows capture the trade and investment interdependency. The model investigates the impact of the Russo-Ukraine military conflict on the bilateral trade and investment between the Russian Federation and the European Union.
... Here is a brief overview is provided of methodologies and results of the literature for developed and emerging economies. Gylfason and Schmid (1983) found support for a long run relationship between exchange rate and trade balance with an expected increase in trade balance due to a 10% devaluation of Pakistan"s rupee to be equal to 1.3% of Pakistani GNP. A study on the effect of 24 devaluation episodes in developing countries over the period 1959-66, Cooper (1971) found that overall, devaluation improved trade balance and balance of payments. ...
This paper investigates the effect of the exchange rate on the trade balance in Nigeria between 1970 and 2012. Annual data were collected from the Central Bank of Nigeria's Statistical Bulletin, and World Development Indicator of the World Bank. Co-integrating and Error Correcting Method were used for this estimation. The main findings that emerged from the study were that; the levels of income of the country as well as its trading partners were strong determinants of the trading activities in Nigeria economy, the effect of exchange rate on trade balance was significant in the long run, but contrary to the aspiration of the policy makers and in contrast to the j-curve hypothesis, the exchange rate had an inverse relationship with the trade balance in Nigeria.
... Source: (Buchholtz, 2022) The central bank counteracted and imposed capital controls by doubling its benchmark interest rates to control currency depreciation and hyperinflation (Verma, February 28, 2022). Empirically, currency devaluation in developing countries has a contractionary effect in the short run and an expansionary impact in the long run (Connolly, 1983;Gylfason & Risager, 1984;Gylfason & Schmid, 1983). However, ruble devaluation will have a neutral effect on Russian exports. ...
This paper intends to establish conceptual foundations for analyzing the economic dimensions of a territorial military conflict. The Intraregiona l Trade Disruption from War Simulator (ITDW-Simulator) attempts to estimate the heterogeneous macroeconomic effects of the military conflict. The model suggests two primary indicators and four secondary indicators. The final trade suffocation index (TS-Index) and the final investment desgrowth from war function (−) measure trade disruption's potential impact on international trade patterns and economic development. The agriculture exports, industrial and manufacturing exports, service exports, and FDI flows capture the trade and investment interdependency. The model investigates the impact of the Russo-Ukraine military conflict on the bilateral trade and investment between the Russian Federation and the European Union.
... Source: (Buchholtz, 2022) The central bank counteracted and imposed capital controls by doubling its benchmark interest rates to 20 percent to control currency depreciation and hyperinflation (Verma, February 28, 2022). Empirically, currency devaluation in developing countries has contractionary effect in the short run and expansionary effect in the long run (Connolly, 1983;Gylfason & Risager, 1984;Gylfason & Schmid, 1983). However, ruble devaluation will have a neutral effect to Russian exports. ...
This paper intends to establish conceptual foundations for analyzing the economic dimensions of a territorial military conflict. The Intraregional Trade Disruption from War Simulator (ITDW-Simulator) attempts to estimate the heterogeneous macroeconomic effects of the military conflict. The model suggests two primary indicators and four secondary indicators. The final trade suffocation index (TS-Index) and the final investment desgrowth from war function (−) measure trade disruption's potential impact on international trade patterns and economic development. The agriculture exports, industrial and manufacturing exports, service exports, and FDI flows capture the trade and investment interdependency. The model investigates the impact of the Russo-Ukraine military conflict on the bilateral trade and investment between the Russian Federation and the European Union.
... (Buchholtz, 2022) The central bank counteracted and imposed capital controls by doubling its benchmark interest rates to 20 percent to control currency depreciation and hyperinflation (Verma, February 28, 2022). Empirically, currency devaluation in developing countries has contractionary effect in the short run and expansionary effect in the long run (Connolly, 1983;Gylfason & Risager, 1984;Gylfason & Schmid, 1983). However, ruble devaluation will have a neutral effect to Russian exports. ...
This electronic monograph is divided into five chapters. The first chapter presents a general description of each chapter respectively. The second chapter introduces a new economic simulator in the case of a war, this new economic simulator is entitled “The Post-War Economic Impact Simulator (PEI-Simulator).” The PEI-Simulator assesses the economic impacts of countries thorough the possible scenario of a partial or full war in three different stages: (i) pre-war stage; (ii) war stage; (iii) post-war stage. The analysis makes use of different indicators such as economic desgrowth from war (-δwar), war intensity (I), war losses (-Lwar), economic wear from war (Πwar), level of war tension (Twar), level of diplomatic negotiations (D), and the total economic leaking from war (Ωwar). Lastly, this research apply the PEI-Simulator to evaluate a possible full war between Russia and Ukraine In this book, the third chapter shows an alternative method to evaluate the impact of Russian and Ukrainian war on the international trade and investments volumes between Russia and European Union (EU). More specifically, we develop a new method, namely the Intra-regional Trade Disruption from War Simulator (ITDW-Simulator). The main idea behind to propose the ITDW-Simulator is to propose a series of new indicators to evaluate trade and investments disruption from war, including the final trade suffocation index (Ts-Index) and the final trade and investment desgrowth from war function (-δw function). Performing the ITDW-Simulator first requires measuring the Ts-Index. Second, we need to calculate the -δw function based on measuring four -δw sub-functions- for example, agriculture sector exports, industrial and manufacturing sector exports, service sector exports, and FDI flows mobility. The measurement of the four -δw sub-functions can show the trade and investment dependency between Russia and the European Union trade among both regions. Finally, we apply the ITDW-Simulator to the Russia-Ukraine war and its impact on the European economy. The fourth chapter will present different simulations to observe the final impact of a armed conflicts between the Russia and Ukraine and its impact on the world oil prices behavior. The main objective of this book is to evaluate different levels of armed conflicts intensity and oil prices behavior from a multidimensional perspective. This simulator evaluates different scenarios of armed conflicts and oil market prices behavior through the construction of a complex algorithm and multidimensional coordinate spaces (Ruiz Estrada, 2017). This new simulator is entitled "The Armed Conflicts Impact on Oil Crisis Simulator (TACIOC-Simulator)". The objective of the TACIOC-Simulator is to offer policy-makers and researchers a new analytical tool to study the impact of armed conflicts on oil prices. The TACIOC-Simulator, in effect, is a simple and applicable scheme. Finally, this research shows the results obtained in the application of TACIOC-Simulator in different armed conflicts scenarios between the Russia and Ukraine. The period of study is from 1982 to 2022 and the reason to select this short period is to observe the constant armed tensions that always exist between the Russia and Ukraine respectively. The fifth chapter introduces a new macroeconomic indicator that is entitled “The Economic Desgrowth Chains (-δchains), Therefore, the “-δchains” are built by the total sum of a large number of economic desgrowth rates (∑-δi) under different countries represented by “i”. Subsequently, (∑-δi) is divided into the total economic desgrowth rates (countries) in analysis (n). We got (∑-δi/n), where i = {1, 2,…,∞+} thus i ≠ 0 or ℝ-). Hence, the economic desgrowth chains (-δchains) are based on the integration of a large number of economic desgrowth rates according to -δChains = ∫f((∑-δi/n)di = lim ∫f(-δi/n)di. The economic desgrowth Chains (-δchains) construction request five basic steps followed by: The first step is to find the total economic leakage (-∏total) that is equal to the difference between the final GDP growth rate annually (αfinal) and the forecast GDP growth rate annually (αforecast). The second step is the calculation of each economic desgrowth rate (-δi) that is using the forecast GDP growth rate annually (αforecast) and the total economic leakage (-∏total) in its calculation. The third step is the calculation of the Total Economic Losses (-Ltotal) that is using only the economic losses determinant –ΔH. Additionally, the calculation of –ΔH is based on a matrix 3x3 that keeps nine different economic leaks represented by (i) the stock market losses leak (L1); (ii) international trade leak (L2); (iii) unemployment leak (L3), (iv) inflation leak (L4); (v) exchange rate devaluation leak (L5); (vi) immigration leak (L6); (vii) war economic leak (L7); (viii) pandemics economic leak (L8); (ix) oil prices economic leak (L9). The fourth step is the calculation of the economic desgrowth Chains (-δChains) that we are using all economic desgrowth rates to consolidate a single result. The fifth step is the visualization of the Economic Desgrowth (-δi) and the Economic Desgrowth Chains (-δchains). Finally, we applied the economic desgrowth Chains (-δchains) in the case of the Russo-Ukrainian war. Finally, the sixth chapter shows a new methodology to observe mathematically and graphically the vulnerability of the world economy in case of a pandemic (COVID-19) or war (Russian-Ukraine War). The main objective of this research is to evaluate the economic damage levels generated from war or pandemics in the short run. The economic damage in this research is taking form in the shape of a possible production collapse, trade dispute, investment disruption, energy shortage, or financial crisis. This chapter assumes that the world economy always is influenced by five global forces' behavior simultaneously. These are the economic global forces behavior; social global forces behavior; political global forces behavior; technological global forces behavior; natural global forces behavior. Hence, the five global forces behavior. These five global forces' behavior keeps a constant interaction and change qualitative and quantitatively together in time and space. At the same time, the five global forces' behavior always has a strong influence on the world economy's vulnerability without any constraints. Finally, we will evaluate how much economic damage can generate the COVID-19 and the Russian-Ukrainian war on the world economy. The seventh chapter evaluates the impact of any armed conflict on the economic performance is obviously substantial, but measuring such impact to get a sense of the intensity of its effects on inflation and unemployment is subject to a great deal of uncertainty. As such, this chapter primarily attempts to close this gap by introducing the war economic destruction level simulator (WEDL-Simulator), a new economic method that could be used to evaluate the impact of an armed conflict on inflation and unemployment simultaneously. Based on five key indicators, the WEDL-Simulator considers and draws its assessment from different focuses of analysis to evaluate the Russo-Ukrainian economic damage. Hence, in this article, the world economy was used to illuminate and illustrate the applicability of the WEDL-Simulator from where analyses provide a coherent evaluation of the degree to which the Russian invasion on Ukraine negative economic effects on the world inflation and unemployment respectively. The last chapter is the eight chapter, this chapter intends to establish conceptual foundations for analyzing the economic dimensions of a territorial military conflict. The Intraregional Trade Disruption from War Simulator (ITDW-Simulator) attempts to estimate the heterogeneous macroeconomic effects of the military conflict. The model suggests two primary indicators and four secondary indicators. The final trade suffocation index (TS-Index) and the final investment desgrowth from war function (−) measure trade disruption's potential impact on international trade patterns and economic development. The agriculture exports, industrial and manufacturing exports, service exports, and FDI flows capture the trade and investment interdependency. The model investigates the impact of the Russo-Ukraine military conflict on the bilateral trade and investment between the Russian Federation and the European Union.
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... Krugman (1989) argues that undervaluation has its channel in productivity to increase economic growth, but even the interest in finding links between undervaluation and economic growth comes from further back. Gylfason and Schmid (1983) develop a general equilibrium model in which they find that a devaluation positively influences real GDP through channels on the supply side, along the same lines, see Taylor and Rosenweig (1984). Although there is extensive literature studying the links between undervaluation and economic growth, the results found have been mixed. ...
In this research, I analyze the dynamic effects of undervaluation on the economic growth per capita of Latin American countries with a period 1980-2018. To estimate these effects, I use a Panel Vector Autoregressive (PVAR) whose estimator is System GMM. The undervaluation variable is created from different measures of the real exchange rate and I also use various measures of GDP per capita to calculate economic growth per capita. I include as control variables macroeconomic and human capital variables to control the different channels of spread of undervaluation on economic growth per capita. The results show that there is a positive effect depending on the definition of the real exchange rate used to calculate the undervaluation. In the results I include the Granger causality test, stability test and impulse response graphs in which I project the response of per capita economic growth to an undervaluation shock. 1. Introduction: There has been extensive debate in the macroeconomic literature about currency devaluation policies to expand the economy. For Asian countries, evidence is found that these policies were fundamental for their rapid economic growth, see Cottani, et al. (1990). Morrison and Labonte (2013) study these policies for the case of China. The theory behind this suggests that a devalued currency may serve to protect newly emerging companies, because it allows them to be more competitive in the world market, but may have negative effects on GDP, see Krugman and Taylor (1978). That is why an interest in studying the imbalances of the real exchange rate has arisen. However, these policies have their detractors, such as Williamson (1990), who points out that an undervaluation policy can produce unnecessary inflationary prices, damaging other productive sectors. Balassa (1982) points out that a devaluation can be interpreted as imposing tariffs and subsidizing exports. Empirical evidence finds scattered results about these impacts on economic growth. Yang et al. (2013) elaborates a global general equilibrium model to estimate the macroeconomic impacts of the appreciation of the Chinese currency in that country and the world, finding that appreciations of this currency can have positive effects on the GDP of the main countries with which it trades. In Latin America there have been some studies investigating the impact of exchange rate devaluations, for example, Mejía-Reyes, et al. (2010) studies the effects of changes in the exchange rate on GDP for five Latin American countries, dividing them into two groups, non-oil and oil countries, finding that for non-oil countries there are negative effects of a depreciation in the short term. Lamau (2017) studies the effects of depreciations of the real exchange rate on growth across sectors in Latin America, finding that a shock of 10% depreciation can increase growth in non-traditional sectors by 0.6 to 2% depending on the channel of transmission. Along this same line, Galindo et al. (2006) studies the effects of the depreciation of the real exchange rate on industrial sectors in Latin America, finding that there are positive effects except for industries with high industrialization. Globally, Kappler et al. (2011) studies the effects of an appreciation of the real exchange rate for a sample of 128 countries found that there are no significant effects on economic growth. Habib et al. (2017) studies the effects of a depreciation of the real exchange rate on growth for 150 countries after the Bretton Woods period, finding that a real appreciation significantly reduces real economic growth. Christopoulos (2004) studies the effects of a currency devaluation on economic growth using a cointegration test, finding insignificant results. As can be seen, there is a key importance in studying the movements of the real exchange rate, and the effects found by various studies are varied depending on the sample size and the methodology used. Our research contributes to the economic evidence in this field because we study the effects of undervaluation on economic growth per capita, but we use various measures to estimate undervaluation using various measures for undervaluation and also for GDP per capita that is used to calculate the economic growth per capita. The methodology that we use is also relatively new that serves to estimate dynamic impacts called the VAR Panel, proposed by Love and Zicchino (2006). The results we find depend on the undervaluation measure we use. If we use the third undervaluation measure, we find positive impacts that, over the time horizon, end up being offset while the first two measures have different effects. This research is presented as follows: Section 02 presents the literature review of studies estimating the effects of undervaluation on economic growth. Section 03 develops how we build our real exchange rate measures with which we estimate the undervaluation, we also develop ways to calculate GDP per capita that will serve to calculate economic growth per capita and, finally, we present our methodology to use to make the estimates, and in section 04 we show the conclusions found in this study. We also added the annexes where other tests developed in our research are shown, the definitions of the variables and their sources, and the countries we used in this study. 2. Literature Review: The term undervaluation means that the price of a good in one country is low compared to the price of other countries, which can be the dollar, see Contractor (2019). Another definition is found in Guzmán, et al. (2012) who point out that they are deviations from a standard income
... The lags, associated with J-curve and initially hypothesised by Magee (1973), were confirmed and the presence of J-curve was established. The results were confirmed by other earlier studies (Gylfason, Schmid, 1983;Gylfason, Risager, 1984;Marquez, 1990). ...
The effects of the real exchange rate changes on the sectoral trade balance (as opposed to the balance of aggregate trade) have received limited consideration in the empirical studies. In this paper we focus on services trade and examine the dynamics of Canada's bilateral trade balance in services with its 53 major trading partners during 1990-2018. To account for slope heterogeneity and cross-sectional dependence we apply mean group (MG), pooled mean group (PMG), common correlated effects mean group (CCEMG), augmented mean group (AMG) estimators to the trade balance equation, alongside the dynamic fixed effects (DFE) estimator. The results provide strong evidence of a short-run deterioration and a long-term improvement of the services trade balance following depreciation in an aggregate panel as well as sub-panels, hence supporting the J-curve effect hypothesis and satisfying Marshall-Lerner condition. At the level of individual cross-sections, the evidence was mixed: a number of economies experienced long-term improvement of the trade balance, albeit without short-term deterioration.
... There are numerous studies that have assessed the relationship between exchange rate movements and economic growth. Connolly (1983), Gylfason and Schmid (1983), Krueger (1978), and Taylor and Rosensweig (1984) supported that devaluation has expansionary effects on economic growth of the nation. But Gylfason and Radetzki (1985), Atkins (2000), Kamin and Roger (2000), Odusola and Akinlo (2001), Berument and Pasaogullari (2003), El-Ramly and Abdel-Haleim (2008) brought contractionary effects of devaluation on economic growth to picture. ...
Indian is one of the fastest growing economies of the world and recent growth rate of the Indian economy has been decelerated. To better understand the growth process, an empirical model using time series approach has been used. The study has used quarterly observations of Real Gross Domestic Product (GDP) at factor cost, Foreign Direct Investment (FDI) inflows to India, Gross Fixed Capital Formation (GFCF), GDP Deflator, Trade Openness and Real Effective Exchange Rate (REER) from 1996-97 to 2017-18 to analyse direction of relationship among these variable. It is observed that the Trade Openness affects GDP positively but Trade Openness is negatively impacted by GDP where as FDI inflow to India has a positive impact on Trade Openness. Further, the REER has negative impact on FDI inflows whereas it is found that GFCF has positive impact on REER. GDP is the major variable that influences the other variables under study. FDI inflow is the outcome of GDP growth. To make the FDI beneficial, the government must improve the absorptive capacity of the country and change the policy related to FDI.
... Many studies have investigated the relationship between exchange-rate fluctuations and economic growth. Early studies include Gylfason and Schmid (1983), Connolly (1983), and Kamin and Klau (1988), which generally found that devaluations led to expansive growth. Subsequent studies, however, provided support for devaluation's contractionary effect on growth (Gylfason & Radetzki, 1985;Odusola & Akinlo, 2001;Berument & Pasaogullari, 2003;El-Ramly & Abdel-Haleim, 2008). ...
This study used monthly data from 2003 to 2017 to analyze the effects of USD/NG₦ exchange-rate volatility on Nigeria’s economic growth. The results from generalized autoregressive conditional heteroscedasticity (GARCH) and vector error correction model (VECM) analyses indicated that USD/NG₦ volatility had a significant effect on the country’s gross domestic product (GDP) growth. The results of the Granger causality/block exogeneity Wald tests and impulse-response functions also indicated that USD/NG₦ volatility had a significant negative effect on the country’s GDP growth. Moreover, USD/NG₦ exchange-rate volatility was found to exhibit short-term unidirectional causality for economic growth. However, a bidirectional relationship was confirmed between narrow money supply and economic growth. Yet, it was also found that the interbank exchange rate, which is a semiofficial Forex window, had little effect on Nigeria’s economic growth—a strong indication that a large portion of the productive sector lacks access to this Forex platform.
... Krugman (1989) argues that undervaluation has its channel in productivity to increase economic growth, but even the interest in finding links between undervaluation and economic growth comes from further back. Gylfason and Schmid (1983) develop a general equilibrium model in which they find that a devaluation positively influences real GDP through channels on the supply side, along the same lines, see Taylor and Rosenweig (1984). Although there is extensive literature studying the links between undervaluation and economic growth, the results found have been mixed. ...
In this research, I analyze the dynamic effects of undervaluation on the economic growth per captai of Latin American countries with a period 1980-2018. To estimate these effects, I use a Panel Vector Autoregressive (PVAR) whose estimator is System GMM. The undervaluation variable is created from different measures of the real exchange rate and I also use various measures of GDP per capita to calculate economic growth per capita. I include as control variables macroeconomic and human capital variables to control the different channels of spread of undervaluation on economic growth per capita. The results show that there is a positive effect depending on the definition of the real exchange rate used to calculate the undervaluation. In the results I include the Granger causality test, stability test and impulse response graphs in which I project the response of per capita economic growth to an undervaluation shock.
This paper analyzes the effect of exchange rate changes on the economic performance in Egypt. Analyzing the effect of exchange rate fluctuations on output in Egypt has been increasingly imperative in the wake of Egypt uprising of 2011 and the subsequent depreciations of the Egyptian pound which ended up with the decision to liberalize the foreign exchange market in 2016. Toward the purpose of the paper, a Structural Vector Autoregression (SVAR) Blanchard-Quah model is constructed using quarterly data for Egypt over the period 2005–2016. This method imposes restrictions on the long-run response of variables to the structural shocks. Such restrictions are believed to be more consistent with the general agreement on the long-run properties of economic theory. The impulse response functions (IRFs) and forecast error variance decompositions (FEVDs) are customary tools to investigate the direction and magnitude of the impact of devaluation on output. The findings of this paper support the significant effect of changes of the exchange rate on real output. The results reveal an initial expansionary effect of devaluation on output that turns to be short-lived contractionary impact. Macroeconomic policies prove to have a positive and significant effect on output. The results confirm the small magnitude of the fiscal multiplier effect on output. In addition, fiscal and monetary policies have a significant effect on exchange rate but with opposite directions.
In this study, the role of currency fluctuations in the impact of monetary policies on Iran's non-oil trade balance has been investigated with emphasis on regime changes during the period of 1973-2017 on a quarterly basis. In this regard, EGARCH regression has been used to model currency fluctuations and STAR regression has been used to investigate the role of these fluctuations in the impact of monetary policy on the non-oil trade balance. The results of STAR model estimation showed that there are two regimes including high and low regime with a threshold value of -4.055 for the trade balance variable in the studied time period.
The results related to the regime of low trade balance is less than (4.055) - shows that the variables of trade balance with one break, real exchange rate, currency volatility index with monetary policy, liquidity and trade openness index are 13.980 respectively. 1.299, 0.462, 1.404 and 2.484 affect the trade balance. In the high regime, the trade balance is more than (4.055) and the trade balance variables with a break, real exchange rate, currency volatility index with monetary policy, liquidity and index
Trade openness has an effect on trade balance by 25.601, 1.604, 0.562, 2.177 and 3.158, respectively. Therefore, in the low regime, the exchange rate fluctuation has a negative effect on the trade balance and in the high regime, it has a positive effect. This result can be due to the severe fluctuations in the exchange rate in the post-revolution era, which caused domestic goods to become cheaper compared to foreign goods and increased non-oil exports due to the decrease in the value of the national currency.
This study explores the asymmetric effects of real effective exchange rate variation on domestic output in nine South East Asian nations. The study is the first thorough study on this issue for these countries. The results show that exchange rate fluctuations have asymmetric long‐run and short‐run effects on production in most nations. However, the findings vary across nations. Appreciation has a contractionary effect on production in most countries, while depreciation has an expansionary effect. In certain economies, an appreciation boosts domestic output whereas a depreciation diminishes it. Such conclusions can only be reached if appreciations and depreciations are separated, using non‐linear models.
Resumen Utilizando metodología VAR bajo un esquema recursivo, el trabajo estima los efectos del tipo de cambio nominal sobre la inversión, el producto y la balanza comercial en Argentina, Chile y Colombia para el periodo 1950-2010. Con el objetivo de analizar la sensibilidad de los resultados obtenidos con respecto al periodo y frecuencia utilizada, también se estimaron VARs trimestrales para un periodo más reciente. Los resultados obtenidos mediante las funciones impulso-respuesta y descomposición de varianza muestran que los shocks cambiarios tienen: a) un efecto positivo sobre la balanza comercial tanto en el corto como en el mediano plazo. b) un efecto contractivo de corto plazo en el producto que está liderado por la inversión y que en el mediano plazo dicho efecto se revierte parcial o totalmente. Mediante el análisis de descomposición de varianza también encontramos que en la mayoría de los casos los shocks cambiarios explican una parte importante de la varianza de la inversión, el producto y la balanza comercial.
This study analyses the impact of exchange rate on macroeconomic aggregates in Nigeria. Based on the annual
time series data for the period 1970 to 2009, the research examines the possible direct and indirect relationship
between the real exchange rates and GDP growth. The relationship is derived in two ways using a simultaneous
equations model within a fully specified (but small) macroeconomic model, and a vector-autoregressive model. The
estimation results show that there is no evidence of a strong direct relationship between changes in the exchange
rate and GDP growth. Rather, Nigeria’s economic growth has been directly affected by fiscal and monetary policies
and other economic variables particularly the growth of exports (oil). These factors have tended to sustain a pattern
of real exchange rate over-valuation, which has been unfavourable for growth. The conclusion is that improvements
in exchange rate management are necessary but not adequate to revive the Nigerian economy. A broad program of
economic reform is required, which includes among others, a complementary restrictive monetary policy. On the
whole, the results are informative.
Keywords: Exchange rate, Macro-economy, Simultaneous equations, Nigeria.
The purpose of this paper is to analyze the dynamic response of a small subset of variables to exchange rate shocks by using a new method based on a set of theory-consistent sign restrictions for the purpose of identifying shocks over time (1995Q1–2019Q1) in the Moroccan economy. It is important to note that the current account presents the so-called “J-curve” phenomenon. Additionally, Morocco entered into a period of deeper and longer recession and higher inflation following the dirham’s depreciation. Following a real depreciation, the output has little effect on improving the current account balance. Our results suggest that the monetary authorities reacted immediately to exchange rate shocks by raising their interest rates to prevent the economy from falling into deflation.
Madeni para sisteminin geçerli olduğu tarihsel dönemlerden günümüz modern ekonomilerinin kâğıt para rejimine kadar geçen tarihsel süreçte, insanlar tarafından çeşitli amaçlarla para kullanımı giderek yaygınlaşmış ve daha karmaşık bir hale gelmiştir. Bu süreçte aynı zamanda “paranın değerinin düşürülmesi”, sık tercih edilen bir iktisat politikası olmuştur. Literatürde “paranın değerinin düşürülmesi” anlamında “tağşiş” ve “devalüasyon” terimleri kullanılmaktadır. Bunlar yer yer aynı anlamı çağrıştırmakta, ancak esasen bazı açılardan birbirlerinden farklılaşmaktadır. Temel olarak tağşiş, madeni para sistemlerinde kullanılan bir uygulama olarak para otoriteleri tarafından madeni paraların değerli maden içeriğinin düşürülmesi demektir ve tağşiş sonrasında parada meydana gelen değer kaybı somuttur. Kâğıt para sistemlerinde kullanılan devalüasyon ise sabit kur rejiminde yine para otoriteleri tarafından paranın değerinin düşürülmesi demektir. Ancak devalüasyonun temsili para sisteminde geçerli olmasına bağlı olarak söz konusu değer kaybı bu kez soyut olarak gerçekleşmektedir. Bu kapsamda çalışmada tağşiş ve devalüasyon uygulamalarının niteliksel özellikleri kıyaslanarak bunları gerekli kılan koşulların ve uygulama sonrasında ortaya çıkan sonuçların karşılaştırılması amaçlanmaktadır. Bu çerçevede öncelikle her iki politikanın da özellikleri ve işleyiş mekanizmaları açıklanmış, ardından karşılaştırmalı analiz yöntemiyle ortak özellikleri ve farklı yönleri değerlendirilmiştir.
Abstract
This paper assesses the various fluctuations in the exchange rate of the currency as well as measuring of the effects of devaluation of currency on the Egyptian economy. The study was conducted using annual time series data over the period from 1980 to 2016, and employing a vector auto regression model (VAR). It appears that the devaluation of the currency is expansionary to the Egyptian economy. Another result is that monetary policy has a positive effect on GDP growth, while government spending has a negative and insignificant impact on the Egyptian economy. Moreover, this study shows that devaluation explain a large part of the real change in Egypt's GDP. As the Egyptian government floated the currency; to encourage investment and stabilize the foreign exchange market due to obvious fluctuations in the exchange rate of the Egyptian pound after the revolution of 25 January 2011, It should take into account poor groups as a result of high prices and encourage individuals on birth control as a result of the large increase in the population
Key words: Exchange Rates, Egyptian Economy, Black Market, Devaluation, Gross Domestic Product.
Devaluations were traditionally considered to be expansionary in the short run and have no real long-run effects. Alternatively, some observers in developing countries found that devaluations were contractionary on impact, and that they might foster long-term growth. Using Argentina as a case study, which is convenient due to its long series availability and its subsequent switches in exchange rate regimes, four structural shocks are identified in line with the traditional and alternative views. It is found that devaluations were mostly contractionary, and that real long-run effects were only possible when inflation was either low or moderate. In light of the estimates, a historical revision of Argentinean devaluation episodes from 1854 to 2018 has been carried out.
This paper explores the effects of currency depreciations on output for the main Latin American countries that have been using Inflation Targeting for almost two decades. We construct VAR models for Brazil, Chile, Colombia, Mexico and Peru for the last two decades and we find that depreciations have short-run contractionary effects in Brazil and Mexico. We illustrate some of the policy implications of that finding by building a simple model, and we show that contractionary effects of depreciations may have destabilizing effects when monetary policy is conducted using a standard Taylor Rule.
KEYWORDS:
Inflation targeting; vector autoregressions; contractionary effects of devaluations; monetary policy rules
The relationship between real exchange rate volatility and the trade balance has been a contentious issue since the fall of Bretton woods agreement of 1973, owing to the lack of unanimity on the effect. This article provides empirical evidence of the link between the real exchange rate volatility and the trade balance in the light of financial development, confirming the assertion that the effect is significantly dependent on the country's level of financial development. Due to Nigeria's relatively undeveloped financial system, its exchange rate dampens the country's exports. Rather than studying the relationship in isolation, we examine the moderating role of financial development on the link between export and the real exchange rate volatility in this paper. The empirical estimation is based on the Nigeria's data set spanning the years 1980–2019, and it employs threshold autoregressive non-linear co-integration and non-linear ARDL estimation techniques. According to the findings, financial development magnifies the beneficial benefits of the real exchange rate on Nigeria's foreign trade. It also states that the uncertainty in foreign capital flows has a negative impact on Nigeria's international trade. The findings have broad policy implications, implying that in order to diversify and improve the economy's future growth and associated international trade, Nigeria's policymakers should promote adequate financial sector development, as financial shocks are amplified by poorly implemented credit markets.
This article examines the asymmetric effects of real exchange rate changes on the domestic output of selected Asian countries. To account for asymmetries, we separate currency appreciation from depreciation and utilize the nonlinear autoregressive distributed lag (NARDL) model. Employing annual data (1973 to 2018), we find evidence of short-run and long-run asymmetries in the effects of real exchange changes on the domestic output of all the countries. This means that currency appreciations have different effects from currency depreciations on the output of the countries. Overall, the results suggest that both currency appreciations and depreciations are contractionary in most cases.
This paper examine the exchange rate pass-through (ERPT) to aggregate CPI, Wholesale Price Index (WPI), sectorial CPI inflation under alternative exchange rate regimes in Pakistan by using restricted recursive VAR pattern methodology for the period July 1991 April 2017. The major findings of the paper are: there is moderate ERPT in domestic inflation. ERPT is high in energy, non-food, non-energy, housing, and transport sectors. The study also concludes that ERPT is high under managed floating exchange rate than flexible exchange rate regime. The result further reveals that ERPT to domestic inflation is high when currency depreciates whereas it has comparatively low when the currency appreciates. This confirms asymmetric ERPT in Pakistan.
This paper examine the exchange rate pass-through (ERPT) to aggregate CPI, Wholesale Price Index (WPI), sectorial CPI inflation under alternative exchange rate regimes in Pakistan by using restricted recursive VAR pattern methodology for the period July 1991 April 2017. The major findings of the paper are: there is moderate ERPT in domestic inflation. ERPT is high in energy, non-food, non-energy, housing, and transport sectors. The study also concludes that ERPT is high under managed floating exchange rate than flexible exchange rate regime. The result further reveals that ERPT to domestic inflation is high when currency depreciates whereas it has comparatively low when the currency appreciates. This confirms asymmetric ERPT in Pakistan.
Bangladesh has been under World Bank-IMF structural adjustment programs with conditionality since the mid-1970s. Implicit in these standardised programs is the belief that currency devaluation is a necessary, if not a sufficient, condition for reducing trade deficits. Insofar as macroeconomic management, the World Bank and IMF maintain that frequent taka devaluation remains necessary in Bangladesh because continual foreign capital inflows, such as foreign aid and loans and overseas workers' remittances, tend to put pressure on the real exchange rate to appreciate. The potential for large-scale foreign investment in the gas and oil sector is another factor causing an appreciation of the real exchange rate. Economists with a structuralist persuasion, however, strongly oppose frequent devaluation in Bangladesh on the following grounds. First, devaluation raises inflation and thus lowers real wages. Second, the Bangladesh economy is plagued with structural rigidities, such that the supply response of tradables to devaluation is very low. Third, Bangladesh imports such essential foodgrains, raw materials, and intermediate goods that have zero or very low-price elasticities. A forced reduction of such essential imports would lower output and raise unemployment. Fourth, whether or not devaluation improves the trade balance, it would contract output by lowering both aggregate demand and aggregate supply. This paper has investigated the effects of devaluation on inflation, trade balance, and output with annual data from Bangladesh. The empirical findings are inconsistent with structuralist views, especially that devaluation causes stagflation and does not improve the trade balance. On the basis of these results (and the present state of the Bangladesh economy), the paper argues that for economic policy-making, devaluation should not be seen in isolation. A mere devaluation will not be enough to raise exports and economic growth substantially. Devaluation should be part of a policy-package whose aim would be to make the economy efficient and growth-oriented. Especially, policymakers should consider devaluation as a means of resource allocation in favour of the tradable sector as Bangladesh has a lopsided production structure.
The purpose of this study is to examine the effects of the real exchange rate (RER) movements on gross domestic product, manufacturing and services sectors growth in Mauritius. A Vector Autoregressive approach is used which accounts for both dynamics and endogeneity in the exchange‐growth modeling. In the growth model, real currency depreciation is observed to be contractionary in the short‐run while it is expansionary in the long‐run. Conversely, real home currency depreciation has expansionary effect on manufacturing output growth in the short‐run while it drops manufacturing output in the long‐run. Finally, real domestic currency depreciation has positive long term effect on services sector performance in Mauritius.
Bu çalışma gelişmekte olan ülkelerde iktisadi hoşnutsuzluk endeksi ile cari açık arasındaki ilişkiyi incelemektedir. Gelişmekte olan ülkeleri temsilen Brezilya, Endonezya, Güney Afrika, Hindistan ve Türkiye’den oluşan kırılgan beşli ülkeleri analiz edilmiştir. Cari açık sorununa sahip bu ülkelerde, gelişmiş ülkelerle kıyaslandığında iktisadi hoşnutsuzluk endeksinin daha yüksek olduğu görülmektedir. Çalışmada iki değişkenli Okun’un iktisadi hoşnutsuzluk endeksi, dört değişkenli Barro ve Hanke’ın iktisadi hoşnutsuzluk endeksi ve üç değişkenli işsizlik, büyüme, faiz oranlarından oluşan iktisadi hoşnutsuzluk endeksi olmak üzere üç farklı iktisadi hoşnutsuzluk endeksi kullanılmıştır. Ülkeler öncelikle ayrı ayrı, daha sonra ise toplu bir şekilde analiz edilmiştir.
İlk olarak, değişkenlerin durağanlık durumları Fourier birim kök testi kullanılarak incelenmiştir. Birinci farkı alındığında durağan hale gelen değişkenler arasındaki uzun dönemli ilişkiyi araştırmak amacıyla Fourier eşbütünleşme testi uygulanmıştır. Uzun dönemli katsayıların tahmini için Dinamik en küçük kareler yönteminden yararlanılmıştır. Farklı düzeylerde durağan olan değişkenler arasındaki uzun dönemli ilişkiyi araştırmak amacıyla sınır testi yaklaşımı kullanılmıştır. Uzun dönemli ilişkinin bulunmadığı durumlarda, değişkenler arasındaki nedensellik ilişkisini araştırmak amacıyla, değişkenlerin durağanlık durumları dikkate alınarak Granger ya da Toda-Yamamoto nedensellik testlerinden biri tercih edilmiştir.
Ulaşılan sonuçlar, incelenen bütün ülkelerde iktisadi hoşnutsuzluk endeksi ile cari açık arasında ters yönlü ilişki olduğunu ortaya koymaktadır. Brezilya, Güney Afrika ve Hindistan’da cari açıktan iktisadi hoşnutsuzluk endeksine doğru tek yönlü uzun dönemli ilişki, Endonezya’da iktisadi hoşnutsuzluk endeksinden cari açığa doğru tek yönlü uzun dönemli ilişki, Türkiye’de ise iktisadi hoşnutsuzluk endeksi ile
iv
cari açık arasında çift yönlü uzun dönemli ilişki bulunmuştur. Ülkelerin ortalaması alınarak yapılan analizler de iktisadi hoşnutsuzluk endeksi ile cari açık arasında çift yönlü uzun dönemli ilişki olduğuna işaret etmektedir.
A simple model is developed to illustrate a number of contractionary effects of currency devaluation, some of which have been noted previously. In a Keynesian model, it is shown that depreciation can lead to a reduction in national output if (i) imports initially exceed exports: (ii) there are differences in consumption propensities from profits and wages; (iii) government revenues are increased by devaluation, e.g. when there are significant export taxes. Similar effects are also shown to exist in monetarist models, via reductions in both real balances and the nominal money supply. A numerical example illustrates the results for an economy ‘typical’ of semi-industrialized countries.
The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior.
This paper reports on an empirical study of the effects of interest rates and inflation on aggregate consumption in the United States. Empirical evidence, based on quarterly U.S. data from the postwar period, is first presented in support of the hypothesis that the real rate of interest varies inversely with the rate of inflation, at least in the short run. Regression estimates of an aggregate consumption function for the United States, also based on quarterly data from the postwar period, are then presented. These estimates indicate that the propensity to consume varies inversely with interest rates and directly with the rate of inflation.