Currency Devaluation And Emerging Economy Export Demand

Illustrated by comparative case studies from Chile, Malaysia and South Korea, this book examines the impacts resulting from currency devaluation on major elements of a developing nation's export portfolio.

The paper finds that simple econometric specifications yield surprising rich and complex dynamics -- relative prices respond to the nominal exchange rate and pass-through effects, import and export volumes respond to relative price changes, and the trade balance responds to changes in import and export values.

Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.

Economists and policymakers are still trying to understand the lessons recent financial crises in Asia and other emerging market countries hold for the future of the global financial system. In this timely and important volume, distinguished academics, officials in multilateral organizations, and public and private sector economists explore the causes of and effective policy responses to international currency crises. Topics covered include exchange rate regimes, contagion (transmission of currency crises across countries), the current account of the balance of payments, the role of private sector investors and of speculators, the reaction of the official sector (including the multilaterals), capital controls, bank supervision and weaknesses, and the roles of cronyism, corruption, and large players (including hedge funds). Ably balancing detailed case studies, cross-country comparisons, and theoretical concerns, this book will make a major contribution to ongoing efforts to understand and prevent international currency crises.

Exchange rate is perhaps one of the most important macroeconomic variables that link the economy of one country with the rest of the world. When it changes, it affects almost all other sectors and many other macro variables. For example, when a countrys currency depreciates, its exports become cheaper in terms of foreign currency and imports more expensive in terms of domestic currency. By exporting more and importing less, the trade balance is improved. Or when domestic currency depreciates (foreign currency appreciates), domestic currency value of foreign assets held by domestic residents increases. If this increase is perceived as an increase in wealth, domestic residents could increase their consumption at home. This leads to an increase in demand for money. However, if there are expectations of further appreciation of foreign currency, they may hold more foreign currency and less domestic currency. Other channels through which currency depreciation affects domestic consumption is through the redistribution effect. Depreciation is inflationary. Since wages do not adjust to inflation instantaneously, profit will be realised at the cost of workers.This amounts to transferring income from workers to producers. Since workers have a high propensity to consumers than producers, eventually domestic consumption declines. Other variables that are said to be affected by exchange rate changes include domestic investment, income distribution, the stock market, etc. This book deals with economic implications of exchange rate changes in emerging economies pertaining to some of the issues mentioned above.

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

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