Some unpleasant currency-devaluation arithmetic in a post Keynesian macromodel

Abstract

ABSTRACTThe conventional view argues that devaluation increases the price competitiveness of domestic goods, thus allowing the economy to achieve a higher level of economic activity. However, these theoretical treatments largely neglect two important effects following devaluation: (1) the inflationary impact on the price of imported intermediate inputs, which raises the prime costs of firms and deteriorates partially or totally their price competitiveness; and (2) the redistribution of income from wages to profits, which ambiguously affects the aggregate demand as workers and capitalists have different propensities to save. New structuralist economists have explored these stylized facts neglected by the orthodox literature and, by and large, conclude that devaluation has contractionary effects on growth and positive effects on the external balance. Given that empirical evidence on the correlation between devaluation and growth is quite mixed, we develop a more general Keynesian–Kaleckian model that takes into account both opposing views in order to analyze the net impact of currency depreciation on the short-run growth rate and the current account. We demonstrate that this impact can go either way, depending on several conditions such as the type of growth regime, that is, wage-led or profit-led, and the degree of international price competitiveness of domestic goods.