Are Depreciations as Contractionary as Devaluations? A Comparison of Selected Emerging and Industrial Economies

46 Pages Posted: 22 Jan 2003

See all articles by Shaghil Ahmed

Shaghil Ahmed

Board of Governors of the Federal Reserve System

Christopher Gust

Board of Governors of the Federal Reserve System

Steven B. Kamin

Board of Governors of the Federal Reserve System

Jonathan Huntley

Northwestern University - Department of Economics

Date Written: September 2002

Abstract

According to conventional models, flexible exchange rates play an equilibrating role in open economies, depreciating in response to adverse shocks, boosting net exports, and stimulating aggregate demand. However, critics argue that, at least in developing countries, devaluations are more contractionary and more inflationary than conventional theories would predict. Yet, it is not clear whether devaluations per se have led to adverse outcomes, or rather the disruptive abandonments of pegged exchange-rate regimes associated with devaluations. To explore this hypothesis, we estimate VAR models to compare the responses to devaluation of developing economies and two types of industrial economies: those that have consistently floated, and those that have sustained fixed exchange-rate regimes as well. We find that both of these types of industrial economies exhibit conventional (i.e., expansionary) responses to devaluation shocks, compared with the contractionary responses exhibited by developing countries. This finding suggests that exchange rate movements may be more destabilizing in developing countries than in industrial countries, regardless of exchange rate regime.

Keywords: contractionary devaluations, exchange rate regimes

JEL Classification: F33, F41

Suggested Citation

Ahmed, Shaghil and Gust, Christopher and Kamin, Steven B. and Huntley, Jonathan, Are Depreciations as Contractionary as Devaluations? A Comparison of Selected Emerging and Industrial Economies (September 2002). FRB International Finance Discussion Paper No. 737. Available at SSRN: https://ssrn.com/abstract=333403 or http://dx.doi.org/10.2139/ssrn.333403

Shaghil Ahmed (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC
United States

Christopher Gust

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

Jonathan Huntley

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

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