Effect Of Real Exchange Rate Depreciation Research Articles

Does Real Exchange Rate Depreciation Boost Capital Accumulation? An Intertemporal Analysis

This paper examines the investment‐enhancing effect of real exchange rate (RER) depreciation in a two‐sector small open economy model where a representative firm in the tradable sector maximises its discounted profit over an infinite planning period. In this framework, a one‐time, permanent, unanticipated depreciation in the RER leads to a higher steady‐state level of capital stock and investment. This consequently increases the optimal investment rate associated with an arbitrary level of capital stock as the saddle path shifts upwards. In the benchmark calibration, the investment‐enhancing effect of RER depreciation is sizeable. One per cent depreciation in the RER leads to an increase of 0.4444 per cent in the rate of capital accumulation.

The J-curve and NAFTA: evidence from commodity trade between the US and Mexico

The North American Free Trade Agreement (NAFTA) was predicted to have a substantial impact on the US–Mexico trade, especially on specific importing and exporting industries. In this article, we use annual industry-level export and import data from 1962 to 2004 to discern both the short- and long-run effects of real exchange-rate depreciation on the Mexico–US trade balance, as well as the effects of NAFTA on this trade. We find that peso depreciation has a positive long-run effect on 24 of 102 Mexican industries and a negative short-run effect on 19 of 102 industries. Only a small fraction (7 of 102 industries) show any support for the J-curve hypothesis. NAFTA has had a significant effect on a significant number of the industries, however.