Effective Devaluation and Exports: Some Issues in Empirical Analysis, with Illustrations from Israel

Abstract

The arguments for and against devaluation are usually based on speculation from theory or intuition, but rarely on statistical evaluations of past devaluations. The relatively frequent devaluations in many developing countries2 stress the need and provide some data for such statistical analysis. But even where data exist for at least relatively simple regression analysis, conceptual issues concerning both dependent and independent variables complicate empirical work and conftise policy discussions. This paper discusses several such issues which arose in an empirical study of Israel, and the solutions adopted. Section I considers what is the most suitable dependent variable. Sections II and III discuss explanatory variables-exchange rates and a growth factor, respectively. Conspicuous by its absence is a foreign demand variable: several attempts to introduce such a variable did not lead to significant results, mainly because of high serial correlation between foreign demand indicators and domestic growth indicators. It may also be argued that Israel's aggregated industrial exports-to which the empirical work refers-generally faced highly (if not infinitely) elastic demand curves. Thus, our main concern is with export supply functions. Some empirical results are presented in Section IV.