Journal article
Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation
Economic Modelling, Vol.28(4), pp.1650-1672
2011
Abstract
Within the context of a small open economy model, this paper examines the repercussions of induced currency depreciation. The results presented in this paper are based on a model with firm microeconomic foundations and which takes into account both the supply and demand-side effects of exchange rate variations. The distinguishing feature of the model is the role of exchange rate expectations. We consider three kinds of expectations; adaptive, extrapolative, and regressive expectations. We also perform several sensitivity tests based on these expectations. Our simulation exercise shows that the effect of induced currency depreciation depends largely on supply-side effects. In most cases, we find that currency depreciation results in (i) a fall in output, (ii) an increase in prices and (iii) an improvement in the balance of trade. In the absence of weak supply-side effects of exchange rates, we find that, if the Marshall-Lerner conditions hold, then depreciation of the home currency has a favorable effect on output but its effect on the balance of trade is negative.
Details
- Title
- Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation
- Authors
- S Z Ali (Author) - Lahore University of Management Sciences, PakistanSajid Anwar (Author) - University of the Sunshine Coast - Faculty of Business
- Publication details
- Economic Modelling, Vol.28(4), pp.1650-1672
- Publisher
- Elsevier BV, North-Holland
- Date published
- 2011
- DOI
- 10.1016/j.econmod.2011.02.017
- ISSN
- 0264-9993
- Copyright note
- Copyright © 2011. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
- Organisation Unit
- School of Business and Creative Industries; Indigenous and Transcultural Research Centre; University of the Sunshine Coast, Queensland; USC Business School - Legacy
- Language
- English
- Record Identifier
- 99449898202621
- Output Type
- Journal article
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