Exchange Rate Devaluation Research Articles

Fool's Gold: The Impact of Venezuelan Currency Devaluations on Multinational Stock Prices

This paper documents negative cumulative abnormal returns (CARs) to five exchange rate devaluations in Venezuela within the context of stiff exchange controls and large black-market premiums, using daily stock prices for 110 multinational corporations with Venezuelan subsidiaries. The results suggest evidence of statistically and economically significant negative CARs of up to 2.07 percent over the ten-day event window. We find consistent results using synthetic controls to causally infer the effect of each devaluation on the stock prices of global firms active in the country at the time of the event. Our results are at odds with the predictions of the efficient market hypothesis stating that predictable devaluations should not affect the stock prices of large multinational companies on the day of the event, and even less so when they happen in small countries. We interpret these results as a suggestive indication of market inefficiencies in the process of asset pricing.

The Influence of RMB Real Exchange Rate on the Technical Structure of Sino-US Export Trade Products

Based on the classification of HS (Harmonized Commodity Description and Coding System), and according to the method of Lall (2000) [1], Sino-US trade products are divided into five categories, namely primary products, resource-intensive products, low technology products, medium technical products and high-tech products. Based on the data from the first quarter of 2005 to the fourth quarter of 2017, the influence of bilateral real exchange rate on the structure of Sino-US export trade was studied by using VAR model in this paper. The empirical results show that there is a strong granger causality between Sino-US bilateral real exchange rate and Sino-US export trade product structure, the former being the latter’s granger reason; in the short term, the appreciation (devaluation) of the real exchange rate between China and the US is conducive (inconducive) to an improvement in the trade structure, which has long been detrimental (beneficial) to the improvement of the trade structure. In general, the appreciation of RMB is unfavorable to the improvement of the technical structure of Sino-US export trade. Variance decomposition shows that Sino-US bilateral real exchange rate has a great contribution to the technical structure of Sino-US export trade.

Does the Depreciation of RMB Exchange Rate Inhibit the Innovation of Export Enterprises?

Based on the sample of Chinese A-share listed companies from 2011-2016, this paper examines the impact of RMB exchange rate depreciation on enterprise innovation from the perspective of investment motivation. The study found that the devaluation of the RMB exchange rate significantly inhibited the innovation of export enterprises. In the sample of export enterprises, this paper uses OLS regression to find that RMB devaluation significantly inhibits the innovation of export enterprises. Further study on the exporting enterprises group found that this conclusion is only significant in the sub-sample of private enterprises, small scale enterprises and enterprises with high industry competition degree. Because these enterprises have a stronger motivation to pursue profits, in case that the depreciation of RMB exchange rate is conducive to exports, they are more likely to increase their investment in production in order to expand their exports, ignoring innovation investment. This shows that the export enterprises are in the face of the short-term profit-making opportunities arising from the devaluation of the RMB, and the weakening of motivation for investment innovation is the mechanism of devaluation of the RMB to curb enterprise innovation. Finally, in the robustness test, this paper considers the lagging effect of RMB depreciation, and replaces the innovation index of enterprises, and the results are still consistent with the main regression results.

Currency Devaluation and Macroeconomic Variables Responses in Nigeria: A Vector Error Correction Model Approach: 1986-2016

Exchange rate devaluation is said to have ripple effects on macroeconomic variables. Hence, this study empirically examined how macroeconomic variables responded to currency devaluation in Nigeria: 1986-2016. In other to achieve our aim, the Augmented Dickey Fuller (ADF) and Philip Peron (PP) stationarity tests were employed to examine the stationarity properties of the variables stated in the model, while Johansen Co-integration test was employed to see if there is a long run relationship among the variables in the model. It was then revealed that, all the variables were integrated of the same order and were stationary at first difference I(1), while the result of the co-integration test revealed that, there is long run relationship among the variables. These therefore necessitates the use of Vector Error Correction Model (VECM) model and Impulse Response in the analysis. The result revealed that, exchange rate devaluation have a positive and significant impact on macroeconomic variables tested, including economic growth in Nigeria. While the impulse response result showed that, real gross domestic product (RGDP), one period lag of exchange rate devaluation, money supply, external reserve, interest rate, balance of payment all responded positively to shocks generated by exchange rate devaluation in the economy; while inflation, trade openness and non-oil export responded negatively. In the same vein, while exchange rate devaluation revealed progressive and noteworthy impact on balance of payment, its impact on non-oil export were found to be negative which is in tandem with the findings from previous studies. It is equally important to state that, even though there are diverse benefits from currency devaluation, but these benefits can only be harnessed when there is improvement in the production of goods and services for both domestic consumption and export purposes.

Structural Change and Energy Use in China: A SAM-based CGE Analysis

This article presents a structuralist computable general equilibrium (CGE) model for China based on a three productive activities—agriculture, energy and industry—social accounting matrix. Four simulation exercises are conducted using this model: industrial investment demand increase, industrial wage increase, exchange rate depreciation, and government spending increase in industry. Our results show that structural change associated with raising industrial labor productivity and employment-share are likely to result in simultaneous intensification of per worker energy-use and a slight reduction of energy productivity in China. Industrial wage increase creates cost-push inflation and output contraction, and exchange rate devaluation is expansionary. Furthermore, when the industrial exports are insensitive to relative price changes, currency devaluation becomes contractionary and wage increase results in a slight contraction in real GDP due to the “forced saving” effect. The model illustrates some policy challenges China faces in its attempt to achieve “green growth” objectives with a high level of employment.

The effect of macroeconomic variables on the opening of antidumping measures: A robust analysis for Brazilian and Argentine economy

AbstractThis paper analyzes the influence of macroeconomic factors on the introduction of antidumping (AD) cases in Brazil and in Argentina. Since this type of research does not have large samples, the relevant variables were selected via Sala‐i‐Martin's (1997) test. The results, estimated using Poisson models, revealed that Brazil and Argentina are influenced by macroeconomic factors. However, the traditional (aggregated) models tend to minimize this influence on Brazil and overestimate it on Argentina. We also found that domestic and foreign income growth, exchange rate devaluation, and a reduction in domestic prices could reduce the number of AD cases in both countries. Therefore, there is evidence that these countries are using the AD law as a political tool, shifting it from its main objective of avoiding unfair trade.

Anatomy of Black Market for Dollars in Sudan

This paper investigates efficiency performance of the black market for foreign exchange in Sudan. The finding of the paper indicates the inefficiency hypothesis cannot be rejected. This result implies, authorities in the central bank need to be cautious about use of the black market depreciation rate as indicator to official exchange rate devaluation rate. The finding of the paper also shows there is no significant evidence of structural change in the behavior of the black market due to the loss of the country a significant portion of its oil revenue after the country split. This result can be interpreted as evidence of weak association of the black market with fundamentals of the economy.

Free Falling Terms of Trade Despite Industrialization: The Case of Bangladesh

Considering Bangladesh’s successful industrialization, Bangladesh’s sharply deteriorating terms of trade (ToT) are a puzzle for the original Prebisch-Singer hypothesis. The Prebisch-Singer hypothesis suggested that countries exporting primary products will experience deteriorating ToT, while countries exporting manufacturing goods will experience ToT improvements. This paper provides an empirical review of Bangladesh’s ToT from 1980 to 2013. It reviews the theoretical literature explaining the Prebisch-Singer hypothesis and uses econometric analyses to determine some of the key factors for Bangladesh’s ToT deterioration. It shows that exchange rate devaluations and increases in export quantity have a negative impact on the ToT, while improvements in export quality have some positive impact on the ToT. In the case of Bangladesh, the problem however is that export quality has been decreasing, contributing to sharply falling ToT. The key policy implication is that export promotion policies need to be refined, focusing also on export quality, not only export quantity.

How can a strong currency or drop in oil prices raise inflation and the black-market premium?

Based on the case of Venezuela, an oil exporter with a multiple exchange rate regime, this paper explains two counterintuitive phenomena. First, a fall in oil revenue can drive a steep rise in inflation by reducing foreign exchange for imports and raising the fiscal deficit financed by money growth. Second, when foreign exchange is rationed, a devaluation of the official exchange rate could produce a transitory fall in inflation by reducing the fiscal deficit and subsidies for buying foreign exchange. The paper also shows that the black market exchange rate can be rising far faster than overall inflation if it is driven by prices in the most distorted goods markets. The channels emphasized in this paper for determining inflation and the black market exchange rate are novel in the literature and may provide avenues of future research on commodity exporters and foreign exchange constraints.

International Trade Theory and the Exchange Rate: A Microeconomic Approach

This is an essay to show the rigorous connection between the neoclassical theory of trade, i.e. the Heckscher-Ohlin model in the context of General Equilibrium conditions, and the real exchange rate as determined by local and foreign prices in a common currency, i.e. the Purchasing Power Parity doctrine. The approach is strictly microeconomic. The purpose of the essay is to analyze the mechanism through which the exchange rate devaluation works for correcting the foreign trade deficit; but considering that, in the real world, this mechanism is not isolated from the influence of other macroeconomic and monetary variables. Some of the most important critiques are presented.

Fiscal Devaluation in a Monetary Union

Given that exchange rate devaluations are no longer available in a monetary union, fiscal devaluations are one potential way to address divergence in competitiveness and trade imbalances. Employing a DSGE model calibrated to the euro area, we quantify the international effects of a fiscal devaluation implemented as a revenue-neutral shift from employers’ social contributions to the value added tax. We find that a fiscal devaluation carried out in the South has a strong positive effect on output, which is five times larger than under a wage tax cut. However, the effect on the trade balance and the real exchange rate is mild. The negative effect on the North’s output is weak.

Stabilization and Rebalancing with Fiscal or Monetary Devaluation: a Model-Based Comparison

The article uses a small open economy version of the macroeconomic general-equilibrium model QUEST to compare fiscal and nominal exchange rate (EXR) devaluation with respect to their impact on economic activity and the current account. In particular, the article investigates quantitatively to which extent fiscal devaluation mimics nominal EXR adjustment and mitigates the output loss associated with demand rebalancing and external adjustment by shifting adjustment from domestic demand contraction to export growth. Fiscal and monetary devaluation support external adjustment and mitigate its impact on economic activity in the presence of price and wage rigidities. The quantitative impact of a tax shift from labour to consumption as the standard example of fiscal devaluation remains very moderate, however (JEL codes: E52, F41, F47).

Effect of Exchange Rate on Trade Balance in Major East African Countries: Evidence from Panel Cointegration

This paper attempts an empirical investigation of the impact of exchange rate devaluation on major east African countries trade balance using the panel co-integration and panel group fully modified least square estimation technique from 1990-2014. Whether exchange rate devaluation improves or worsens trade balance has been at the centre of literature debate over time with varying empirical evidences for developed and developing nation. The results indicate that there exist a long-run stationary relationship between trade balance and its determinant- foreign and domestic income, nominal exchange rate as employed in the study. The research major findings include; nominal exchange rate induces inelastic and significant relation on trade balance in the long run. From this, the paper concludes that the trade balance deteriorate with increasing depreciation of exchange rate (as a value effect in east African countries). Again, it found that the coefficient of domestic income is negative and significant implying that the booming of real domestic income increases the purchasing power of their household to import more resulting trade deficit in the long run. Moreover the paper found that inelastic coefficient of nominal exchange rate in line with the theoretical Marshall-Lerner condition i.e. “the demand for import and export is inelastic then devaluation would further increase the trade deficit” [21]. Therefore based on the empirical findings the researcher recommends that the policy maker of these countries should take emphasis not to devaluate exchange rate more and selecting countries with higher income to make import and export elastic and improve trade balance in the long run.

Industrial pricing in Brazil in the 2010s: The pass-through effect

Abstract The aim of this paper is to discuss the impact of costs on industrial inflation in Brazil. Assuming that inflation is mainly cost-push, this paper estimates the exchange rate pass-through on industrial prices. Based on Kalecki’s price equation, the paper explores data from the producer price index from 2010 onward. One of the main findings is that more than 60% of the inflationary acceleration in the industrial prices can be explained by exchange rate devaluations. The econometric exercise also showed that when demand increases, even if labor unit costs do not change, firms increase their profit margin. Finally, the paper questions the effectiveness of the inflation targeting policy, when the diagnosis to the pressure on prices comes from the costs, and not from demand.

The euro crisis, fiscal devaluation, and impacts on the tourism sector in the Spanish economy

The current account imbalances between northern and southern euro area countries from 1998 to 2007 have been considered one of the key problems in the euro crisis. Cumulated over 12 years, the sustained differentials of high inflations in south countries led to a cumulative price differential relative to the north countries and contributed to the deterioration in competitiveness. In addition, south countries cannot use nominal currency devaluation, as it used to do before. Because of the high costs of internal devaluation, the policy option of a tax combination can replicate the effects attained under nominal exchange rate devaluation. In this article, we analyze the impacts of a fiscal devaluation on the tourism sector in the case of Spanish economy.

Exchange Rate, Income Distribution and Technical Change in a Balance-of-Payments Constrained Growth Model

ABSTRACTThis article develops a formal model that accounts for the net effect of an exchange rate devaluation on the long-term balance-of-payments constrained growth rate. Such a model investigates how a currency devaluation impacts on the home country non-price competitiveness via changes in income distribution and the rate of technological innovation. The model is built upon two plausible hypotheses. First, it is assumed that the rate of technological innovation is directly related to the income elasticity of demand for exports and inversely related to the income elasticity of demand for imports. Second, it is assumed that a redistribution of income between labor and capital has an ambiguous direct impact on the income elasticities ratio. The model shows that the net impact of a currency devaluation on growth can go either way depending on the institutional framework of the economy.

Are State- and Time-Dependent Models Really Different?

Yes, state- and time-dependent models are really different, but only for large monetary shocks. In particular, we show that in a broad class of models where shocks have continuous paths, the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks instead depends on the nature of the friction: the impulse response of inflation to monetary shocks is independent of the shock size in time-dependent models, while it is nonlinear in state-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries from 1974 to 2014 to test for the presence of state-dependent decision rules. We present some evidence of a nonlinear effect of exchange rate changes on prices in a sample of flexible exchange rate countries with low inflation. We discuss the dimensions in which this finding is robust and the ones in which it is not.

Fiscal limits in developing countries: A DSGE Approach

This paper studies fiscal limits in developing countries using a dynamic stochastic general equilibrium (DSGE) approach. Distributions of fiscal limits, which measure a government’s capacity to service its debt, are simulated based on macroeconomic uncertainty and fiscal policy. The analysis shows that expected future revenue plays an important role in explaining the low fiscal limits of developing countries, relative to those of developed countries. Large devaluation of real exchange rates can significantly reduce a government’s capacity to service its debt and lower the fiscal limits. Temporary disturbances, therefore, can shift the distribution of fiscal limits and suddenly change perceptions about fiscal sustainability.

Are State- and Time-Dependent Models Really Different?

Yes, but only for large monetary shocks. In particular, we show that in a broad class of models where shocks have continuous paths, the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks instead depends on the nature of the friction: the impulse response of inflation to monetary shocks is independent of the shock size in time-dependent models, while it is non-linear in state-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. We present some evidence of a non-linear effect of exchange rate changes on prices in a sample of flexible-exchange rate countries with low inflation. We discuss the dimensions in which this finding is robust and the ones in which it is not.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The Distributional Consequences of Large Devaluations

We study the impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Poor households spend relatively more on tradeable product categories and consume lower-priced varieties within categories. Changes in the relative price of tradeables and of lower-priced varieties affect the cost of living of low-income relative to high-income households. We quantify these effects following the 1994 Mexican devaluation and show that they can have large distributional consequences. Two years post-devaluation, the cost of living for the bottom income decile rose 1.48 to 1.62 times more than for the top income decile. (JEL D12, D31, E31, F31, O12, O19, O24)