Devaluation Policy Research Articles

Relative responses of trade in goods and services to currency devaluation: Evidence from Ethiopia

Lack of hard currency is one of the key growth barriers in emerging countries, as imports vastly outstrip exports. In response, governments in these countries usually undertake a variety of policy packages, including the devaluation of the domestic currency. Despite these efforts, there have been no discernible adjustments to foreign balance. This study examines whether the response to devaluation differs significantly between the goods and services trade in Ethiopia. We estimate the long- and short-run elasticities of the disaggregated trade indicators using an autoregressive distributed lag (ARDL) and error correction mechanisms. The empirical results confirm a significant difference between the goods and service sectors in terms of their responses to the devaluation policy in the long and short run. The estimated long-run elasticities of devaluation are only statistically significant for service imports and trade balances with negative signs. The remaining sectors did not show any significant relationships. In addition, we obtain meaningful short-run elasticities for service imports, goods exports, and total exports, all of which have a negative sign. Domestic inflation accounted for a large portion of the short-run import dynamics, output growth, and FDI, which contributed significantly to long-term export performance. The current study reveals that the government should not rely exclusively on the devaluation policy to bridge its external imbalances, and should see alternative and more effective policy mixes to alter the demand and supply sides of foreign trade.

Stock Returns and State-Dependent Effects of Changes in Exchange Rate and Money Supply from Central Banks

This study investigates the state-dependent effects of exchange rate movements and money supply shocks on stock market returns using daily stock returns, exchange rate, and variations in money supply data obtained from the databank.worldbank.org website from 1990 to 2022. The stock markets of ten emerging and developed countries were used in the study. The Markov-Switching regression methodology was utilized for this study. The results suggest that for the developed stock markets, in Regime 1, a positive shock to the money supply stimulated a significant rise in the stock returns while in Regime 2, a positive shock to the money supply induced a drop in returns. This suggests that for the developed stock markets, the effect of money supply shock on returns is state-dependent. In the developing stock markets, the coefficient for exchange rate was negative and significant in Regime 1, while it was insignificant in Regime 2. Therefore, the effect of exchange rate on returns is state-dependent in developing countries. Also, the coefficient for volatility in the exchange rate was negative and sizable in both regimes, indicating that the returns effect of volatility is not state-dependent. Basically, each day the exchange rate appreciates, stock returns rises in the developed stock markets while a devaluation policy executed in developing countries stimulated some decline in returns of emerging markets. In both regimes, a rise in money supply shock had positive and significant returns. The effect of money supply on stock returns is not state-dependent. Consequently, developing countries need flexible approaches to managing the variations in the exchange rates and money in circulation. While policymakers in developed markets may need to focus more on reducing volatility rather than adjusting exchange rates to influence stockpiling, those of emerging countries could benefit more from policies that stabilize exchange rates.

Wage flexibility and employment resilience in the Spanish labour market over the Great Recession

ABSTRACT The Spanish economy is characterized by significant and persistent regional disparities. The Great Recession caused a severe economic downturn, marked by declining wages and rising unemployment, influenced by the internal wage devaluation policies. We investigate the relationship between wage flexibility and regional labour market resilience. We estimate a spatial panel wage curve using microdata from social security records for the period 2002–19 using geographical and time weighted regression techniques. Our findings reveal that regions with higher wage flexibility exhibit higher resilience recovery indices, highlighting the importance of wage flexibility as a short-term adjustment mechanism in response to labour market shocks.

Analysis of the Nature and Determinants of Energy Price Dynamics in Sub-Saharan Africa (SSA)

Abstract Energy is one of the most important resources needed for growth, and consumption is an indicator to measure the development of a country. Sub-Saharan Africa (SSA) is among the sub-regions in the world with the lowest energy use per capita and one of the reasons for this is the energy price dynamics that have affected energy policy that can engender sustainable economic growth. The main objective of the study is to assess the nature and determinants of energy price dynamics in SSA using 21 countries with a complete dataset between 1980 and 2017 on variables such as energy consumption, exchange rate, and inflation rate, while energy price index and federal fund rate are also included as exogenous variables. EGARCH is used to derive the nature of energy dynamics, while panel-ARDL is used to investigate the determinants of energy price dynamics. The results show that energy price dynamics are asymmetric in nature, while the federal fund rate and exchange rate remain the most important factors influencing energy price dynamics in the sub-region. The finding is contrary to the symmetric energy price obtained by some previous authors who used oil price to proxy energy price. This study used aggregated values of energy prices, which include renewable and non-renewable energy. The implication of the findings is that currency devaluation and rise in federal fund rate aggravate the dynamics in energy piece and this causes much more macroeconomic instabilities in SSA. It is recommended that SSA countries should be cautious to embrace currency devaluation policy, and should reduce dependency on the importation of renewable energy products.

The effects of currency devaluation on Ethiopia’s major export commodities: The case of coffee and khat: Evidence from the vector error correction model and the Johansen co-integration test

Devaluation of the currency has been stipulated and utilized increasingly as a stabilization device in developing countries. The Ethiopian government employed a devaluation policy to improve the export performance of the country. However, various literature demonstrates that the devaluation of the Ethiopian Birr (ETB) has an ambiguous effect on the country’s export performance. Therefore, the prime objective of the study was to investigate the effect of domestic currency devaluation on Ethiopian major primary export commodities by employing time series data for the period 1987 to 2020. With the help of Johansen’s co-integration and vector error correction modelling, the impact of the devaluation of the real effective exchange rate on major export commodities was assessed in the long run as well as in the short run. The study found that the devaluation of the real effective exchange rate has a positive and significant relationship with the values of major export commodities in the long run. This implies that the decrease in the value of the domestic currency promotes exports in the long run. Other variables like foreign direct investment, with an expected positive sign, and real gross domestic product (with a negative sign), are also found to be statistically significant in explaining exports in the long run. The findings of this paper suggest that policy intervention in the form of devaluing the domestic currency could be effective in improving export performance given that the effect of inflation on output is controlled.

РЕГУЛЯТОРНИЙ ПОТЕНЦІАЛ ФІСКАЛЬНОЇ СИСТЕМИ УКРАЇНИ: ЗМІСТ ТА ОСОБЛИВОСТІ РЕАЛІЗАЦІЇ В УМОВАХ ЕКОНОМІЧНОЇ НЕСТАБІЛЬНОСТІ

The urgency of the topic is due to the need to study the mechanism of the regulatory function of taxes through which the state actively influences the macroeconomic processes in conditions of economic instability. In conditions of economic ups and downs, the fiscal system, as a basic element of the economy, on the one hand, provides the financial foundation of the state, and on the other hand - is one of the main tools for tax policy and government intervention in the economic system. Taxes are an integral part of the fiscal system; they are an objectively existing institution of society, and one of the factors influencing social and economic development, which requires a study of its mission and content. The peculiarities of the regulatory function of taxes in the conditions of endogenous and exogenous factors of instability are revealed. It is shown that integration into the external uncertain financial space causes a number of non-standard problems for the national system of state regulation of the economy, in particular, the problem of choosing between the policy of nominal devaluation and the policy of fiscal devaluation. The article analyzes the quantitative criteria of tax policy and their impact on the effectiveness of the regulatory function of data in Ukraine during 2014-2022. Based on the analysis the conclusion is made about the predominantly fiscal focus of regulatory measures of modern state tax policy. To assess the limitations of the regulatory and instrumental role of taxes in performing the exclusive functions of the state in the economy and society, we described the institutional limitations of the regulatory function of taxes due to their connection with the institutional structure of the economy through the channels of economic sovereignty and legitimacy, trust and state debt. The content of institutional traps related to the deficit of tax revenues to the state budget is revealed, and it is shown that the tendency to avoid these traps is an institutional feature that limits the effect of tax instruments of state regulation of economic processes. Some ways of tax reform in Ukraine are given.

The results of internal devaluation policy as a crisis exit strategy: The case of Spain

AbstractIn line with the orientation of EU economic policy, the Spanish government has favoured a strategy of internal devaluation as a way of adjusting price levels within the currency union and offsetting the fall in competitiveness accumulated over time, as evidenced by the persistent trade deficit. The results of comparative empirical studies indicate that the internal wage devaluation applied in Spain as a crisis exit strategy (in the form of labour reforms and, in general, measures to contain labour costs) does not seem to have attained the desired goals in terms of reducing the relative prices of exports and consolidating a model of growth based on external demand. Indeed, the estimates drawn up show that tailwinds – the depreciation of the euro as a result of the measures taken by the ECB, greater economic activity by trading partners and the fall in the price of oil – exercised a decisive influence in the trends followed by the prices of exports and the balance of trade during the period of crisis management in Spain.

The Borchardt Hypothesis: A Cliometric Reassessment of Germany’s Debt and Crisis during 1930–1932

This research examines whether an alternative exchange rate policy could have mitigated Germany’s recession from April 1930 to May 1932, when Heinrich Brüning was Reichskanzler of the Weimar Republic. Using an open-economy dynamic model as our analytical framework, we examine the arguments against adopting the devaluation policy. Our counterfactual analysis suggests that a widely held belief—that floating the Reichsmark would have led to high inflation—is unwarranted. Despite Germany’s high foreign debt, floating the Reichsmark would have led to less of a decline in both real GDP and employment for the country during the Great Depression.

On Measuring the Impact of Internal Devaluation in Greece: Poverty, Flexibility, Migration and Growthless Employment

This article takes a critical view on austerity policy and examines its social and economic consequences for the case of Greece. By introducing the concept of “growthless employment” it demonstrates that the implementation of internal devaluation policies had a substantial impact on the Greek society that needs to be addressed. Within a decade, household disposable income was reduced to an unprecedented level while the labour market was extensively deregulated as several indicators can display. The seemingly paradoxical case of employment without growth—hence, growthless employment—can be interpreted as the consequence of the intensity of the mix of austerity policies that was imposed as “one-size-fits-all” without taking the peculiar structure of the Greek economy into account. A descriptive examination of this idiosyncratic state of affairs is offered, providing new insights on how the level of depreciation can be better assessed. It is argued that the overall severity of the crisis is better captured by the level of disposable income whereas a modified measurement of poverty and income depreciation is introduced for the same purpose. Lastly it is maintained that Greece has suffered by an enormous outflow of its productive-aged population in the aftermath of the crisis. All the above concretise the idea of growthless employment in Greece.

Currency Devaluation Policy And Its Sharī‘ah Rulings

Currency Devaluation Policy And Its Sharī‘ah Rulings

Assessing the internal devaluation policy implemented in Greece in an empirical stock‐flow consistent model

AbstractΑn empirical stock‐flow consistent model is constructed aiming to investigate the impact of the internal devaluation policy on the real GDP, the unemployment rate and the sector financial balances. The private expenditure of the aggregate private sector is affected by functional income distribution, which in turn is determined by the minimum wage and flexible employment, among other factors. The model is then applied on the Greek economy. Findings suggest that the implementation of internal devaluation fueled the destabilizing dynamics at play and hindered the export capacity of the economy through a negative effect of lackluster demand on productivity.

The management of the Eurozone in crisis times: Actors, institutions and the case of bailout packages

The adjustment to the financial crisis was particularly brutal for Eurozone countries targeted by private bondholders. Financial assistance through the newly created Eurozone governance system was conditional on the implementation of austerity measures and the introduction of structural reforms in industrial relations (decentralization of collective bargaining and liberalization of employment protection). Our analysis focuses on the formation process and the structural features of Eurozone supranational institutions. Building from the insights of actor-centred institutionalism, we illustrate the importance of coalitions among some, but not all, important actors based on the overlapping of their non-monolithic preferences in the process of institutional innovation. The structural features of Eurozone institutions curtailed member states’ ability to effectively resist the imposition of internal devaluation policies. A contested outcome, these institutional features were secured by a specific coalition of important actors – most notably, the German government and the European Central Bank – based on their overlapping interests around internal devaluation policies.

Internal devaluation and economic inequality in Portugal: challenges to industrial relations in times of crisis and recovery

Internal devaluation policies imposed in southern European countries since 2010 have weakened labour market institutions and intensified wage inequality and the falling wage share. The debate in the wake of the financial and economic crisis raised concerns about slow wage growth and persistent economic inequality. This article attempts to shed light on this debate, scrutinising the case of Portugal in the period 2010–2017. Mapping the broad developments at the national level, the article examines four sectors, looking in particular at the impact of minimum wages and collective bargaining on wage trends vis-à-vis wage inequality and wage share trajectories. We conclude that both minimum wage increases and the slight recovery of collective bargaining had a positive effect on wage outcomes and were important in reducing wage inequality. The extent of this reduction was limited, however, by uneven sectoral recovery dynamics and the persistent effects of precarious work, combined with critical liberalisation reforms.

Investigating the Marshall-Lerner’s Condition Regarding the Intermediate Goods Importing in Iran’s Economy

The Marshal-Lerner’s condition is an answer to this question: Can a devaluation of the currency improve the balance of payments (net export value) in the country's interest? This condition is with some hypotheses that one of them is the independence of exports from imports. Concerning the statistical evidences of Iran’s economy based on the statistics of the Central Bank, it is specified that more than 80 percent of Iran’s imported goods are the intermediate goods (investing and intermediate). Therefore, in this research, we have examined the mentioned condition by considering exports as a function of imports. Firstly, regarding the exports as the function of imports, the Augmented Marshal-Lerner’s condition has been extracted, then for investigating the Marshal-Lerner’s condition in Iran using the Auto-Regression Distributed Lag (ARDL) during the 1961-2020, we have estimated the demand functions of import and export. The scientific results of the study show that by violating the condition of independence of exports and imports, an amount equal to the elasticity of imports relative to the real exchange rate in the elasticity of exports relative to imports is added to the Marshall-Lerner’s condition. The experimental results of the research, based on the estimation of the extractive model of the scientific sector, do not confirm the establishment of the Augmented Marshall-Lerner condition in the Iranian economy. Therefore, the devaluation policy cannot help improve the trade balance.

The asymmetric J-curve phenomenon: Kenya versus her trading partners

This paper examines asymmetries in the J-curve effects of real exchange rate on Kenya’s trade balance by using panel data for bilateral trade with 30 trading partners. The data covers the period from 2006q1 to 2018q4 and the Pooled Mean Group (PMG) estimation technique, under both the linear and nonlinear ARDL frameworks, is applied. This paper departs from previous studies by using a modified version of the standard trade balance model, which is more suited for bilateral trade analyses, and by incorporating nonlinearities. The findings of the PMG estimation based on the assumption of symmetric exchange rate effects reveal J-curve effects in only 7 bilateral trade relations. However, when the estimation is performed assuming asymmetric effects, the J-curve effects are evident in 13 cases. Long-run and short-run asymmetries are also confirmed and it is established that a simultaneous bilateral real depreciation of the exchange rate boosts the long-run trade balance. The implication of these findings is that a devaluation policy can be used to raise competitiveness of Kenya’s exports in the long-run.

An Empirical Evaluation of the Bilateral Non-oil Export Trade Balance between Nigeria and Egypt: A Test of Marshall-Lerner Condition

Bilateral trade is the exchange of goods between two nations promoting trade and investment. The two countries will reduce or eliminate tariffs, import quotas, export restraints, and other trade barriers to encourage trade and investment. The Marshall-Lerner (M-L) condition which is at the heart of the elasticities approach to the balance of Trade. The condition seeks to answer what happens to the current-account balance of a country when there is a devaluation of the currency. In this study, an empirical examination of the validation of M-L Condition was examined in the Bilateral Non-Oil Export Trade Balance between Nigeria and Egypt for the period 1980 to 2018. The distributed lag (DL) mechanism was used to estimate the short as well as the long run parameters. The results of the findings validated the M-L Condition in the trade relations with Egypt in the short and long run and that the M-L Condition is supported by data. The study amongst others recommended that for Nigeria to implement any devaluation policy, Nigeria must first and foremost ensure a substantial increase in her non-oil exports as against imports. This is the only way the benefits can be maximized for the country.

Peripheral Europe beyond the Troika: assessing the ‘success’ of structural reforms in driving the Spanish recovery

Since 2014 the Spanish economy has recovered positive GDP growth, and the country has been growing well above the eurozone average. This recovery has sparked an academic and political debate concerning the role that structural reforms, prescribed by the ‘Troika,’ have played in peripheral Europe. For certain scholars and institutions, these structural reforms have allowed the market, through greater wage flexibility, to make the necessary adjustments to restore economic growth, resulting in a ‘healthy’ economic recovery. But to what extent is this mainstream narrative solidly backed up by the empirical evidence? Can Spain be held up as an international example of the ‘success’ of these reforms? The aim of this paper is to shed light on this debate. We consider that labor market reforms and wage devaluation policy are not the drivers of economic recovery. Instead, we offer an alternative explanation for recovery based on the theory of demand-led growth.

An explicit partial‐equilibrium model to justify the Generalized Marshall‐Lerner condition (GML)

AbstractRobinson's derivation of the Marshall‐Lerner condition (ML) is more general in that she considers a situation where initially the trade balance is not in equilibrium with the incorporation of the supply curves of exporters. This paper examines a partial equilibrium analysis of a country's imports and exports markets within a theoretical model which considers both the demand and supply sides in these two internationally traded‐goods markets. The aim here is to show explicitly how the Generalized Marshall‐Lerner condition (GML) of Robinson can be obtained. We examined the two effects of the nominal depreciation of the domestic currency on the trade balance: the volume effect and the value effect and how they counterbalance each other. We found that the standard Marshall‐Lerner condition (ML) was not sufficient when the trade balance was initially in deficit and it was also not necessary if the trade balance showed an initial surplus. Moreover, this study provides a new interpretation for Robinson’ sufficiency condition where the trade balance must improve following a nominal depreciation of domestic currency when the elasticity of foreign demand exceeds the ratio of imports to exports. This paper also examines the situation of a small open economy which could not influence the world prices where the foreign demand for exports and the foreign supply of exports are infinitely large. Finally, there is a discussion on two policy implications for exchange rate regulation: the amount of devaluation that is necessary to improve a given trade imbalance as a governments intervention and additional support for the slow improvement of the trade balance in the short run after a devaluation policy known as the J‐Curve effect.

Phillips Curve: The Greek Case

One of the most important problems facing Greece is the long-term and high-level unemployment rate. The Economic Adjustment Programmes (EAPs) focused on the supply side of the economy, aiming at the adjustment of prices and wages, draw on the classical economic model, as it is widely accepted that internal devaluation policies keep inflation low. This article attempts to examine whether the Keynesian theory and the Phillips Curve, which shows the relationship between unemployment and inflation, apply in the case of the Greek economy. We use descriptive statistics, ordinary least squares (OLS) and VAR Analysis to examine the relationship between the variables. According to the results, there is a negative correlation between unemployment and inflation in Greece, thus confirming the Phillips Curve hypothesis. Finally, results show that unemployment is less dependent on inflation compared with the past, and there are numerous other decisive factors affecting unemployment.

Streetscapes and stereotyping: streets named after Martin Luther King, Jr., and the geographies of racial identity

In addition to recognizing a commemorative space and geography that serve to legitimize a particular racial identity, streetscapes in the U.S. named after Dr. Martin Luther King, Jr., (MLK) are also a stereotyped space that is presupposed as marginalized. The main objective of this paper is to investigate whether stereotyped MLK neighborhoods differ from the lived spaces. To achieve this objective, the paper relies on two indexes of segregation: namely dissimilarity and interaction indices, the racial composition, and the socioeconomic characteristics of MLK neighborhoods in the 48 contiguous states. Both dissimilarity and interaction indices implied higher segregation in the South and Midwest. The higher proportion of the African American population relative to Whites and other races in the MLK neighborhoods, except in California, confirms that the MLK streetscapes are racially concentrated spaces. Further, analysis of socioeconomic variables does resonate with the stereotype of MLK neighborhoods as marginalized spaces. To demystify the stereotype and to reconstruct the identity of African Americans and their lived and experienced spaces, this paper draws upon studies of the broader process of racialization, critical toponymy, and stereotype theories. Based on this exploratory approach, the paper concludes that though the characteristics of MLK neighborhoods reflect their marginalized status, this status is itself the result of a broader process of racialization. This process has distributed resources unequally among racial groups, forming and buttressing negative stereotypes about African Americans while also stigmatizing their living spaces, which are all too often susceptible to a policy of benign (or not-so-benign) neglect, property devaluation, and industrial pollution.