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Currency Devaluation and Growth

01 Jan 1994-Vol. 47, Iss: 1, pp 69-83
TL;DR: In this paper, the effects of devaluation on output growth in low income economies (LIEs) were examined and it was pointed out that devaluation may have a negative effect on the output growth not only in the short run but also in the long run.
Abstract: This study examines the effects of devaluation on output growth in Low Income Economies (LIEs). The study includes that devaluation docs have a negative effect on output growth in not only in the short-run, but also in the long run. The study points out why devaluation, as a stabilization tool or as a strategy for economic growth, as it is presently recommended and administered, may not be suitable for LIEs. It points out further, why devaluation in LIEs may fail to generate the responses and benefits usually expected from the process, and some reasons why devaluation may instead worsen the economic conditions of these countries. In conclusion, the study questions the indiscriminate prescription of devaluation and related structural adjustment policies f or LIDO»; a some how blanket prescription that havoc hardly proved. to be optimal or beneficial to most LIDO».
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01 Jan 2000
TL;DR: In this paper, the effects of currency devaluation on output growth in less developed countries (LDCs) were analyzed using data from 18 sample countries in a fixed-effect procedure.
Abstract: This paper discusses the effects of devaluation on output growth in Less Developed Countries (LDCs). The issue has played an important role in the economic and political agendas of developing countries for several decades during which devaluation has been one of the most frequently used policy tools under both IMF-regulated and independent stabilization programs in these countries. Whether devaluation of the currency affects national income positively or negatively has also received considerable attention among academic researchers. In this paper, in order to analyze empirically whether or not devaluation results in output contraction in LDCs, data from 18 sample countries are used in a fixed-effect procedure. LDCs are divided into two categories and two different regression analyses are conducted. First, data from a group of 10 countries, including both manufacturing product exporters as well as agricultural and primary product exporters, are used to estimate a model of real output behavior for a period of 25 years. Then, to investigate if there exists a qualitative difference between different countries in terms of the effect of devaluation on economic growth, data from two different groups of countries (8 manufacturing exporters, 8 agricultural and primary exporters) are analyzed for a 20- year period. In addition to the change in real exchange rates, the role of monetary and fiscal policies, as well as terms of trade changes, are incorporated into the model as the possible determinants of real output growth. The results indicate that devaluation creates a contractionary effect on output in the first year, whereas it has an expansionary effect in the following year. Also, the results suggest that there is no qualitative difference between manufacturing exporters and agricultural exporters in terms of the effect of devaluation on output growth. Fiscal expansion (increasing relative size of government expenditure) has a significant positive effect on output growth for all countries, regardless of their export composition. The effect of terms of trade changes on output is generally negative for agricultural and primary exporters, but fluctuating for manufacturing exporters. Manufacturing product exporters have a higher output growth trend than agricultural and primary exporters.

39 citations

Journal ArticleDOI
TL;DR: In this article, the relationship between the real exchange rate, real wages and aggregate output is analyzed for the case of Brazil, a country which has recently undergone an exchange-rate-based stabilization plan and where the impact of exchange rate anchoring on real sector seems to be relevant.
Abstract: This paper analyses the relationship between the real exchange rate, real wages and aggregate output. We present a model in which changes in aggregate output and in the real exchange rate precede changes in real wages, and where output is expected to positively affect real wages while changes in the real exchange rate are expected to negatively affect real wages. The empirical analysis is carried out for the case of Brazil, a country which has recently undergone an exchange-rate-based stabilization plan and where the impact of exchange rate anchoring on the real sector seems to be relevant. Using monthly data for the period 1985 to 2001, Granger causality tests and Johansen's Maximum likelihood estimates confirmed the assumptions of our model by showing that real wages are positively affected by output and negatively impacted by the real exchange rate in the long run. [F31, F41, J39]

3 citations