Exchange rates

Antoine Berthou, Filippo di Mauro, 24 December 2015

The effect of exchange rate devaluations on a country’s exports is frequently debated, with some supporting a strong impact and others suggesting no sizeable response of exports to relative price changes. This column argues that firm heterogeneity in terms of productivity and size can explain the opposing views. The measured reaction of aggregate exports to relative price movements is largely determined by the reaction of the most productive/largest companies.

Javier Cravino, Andrei Levchenko, 23 November 2015

Large exchange rate swings remain a prominent and recurring feature of the world economy. This column uses household consumption patterns to examine the distributional impact of the devaluation of the peso during Mexico’s ‘Tequila Crisis’. Cost of living increases are found to be 1.25 to 1.6 times higher for the poor compared to the rich. In the interests of equity, exchange rate policy should take account of such distributional impacts.

Daniel Leigh, Weicheng Lian, Marcos Poplawski-Ribeiro, Viktor Tsyrennikov, 30 October 2015

A number of studies argue that exchange rates matter far less than they used to for trade, or even that they have disconnected altogether. This column presents new research suggesting that, in fact, there is little sign of a disconnect in the relationship between exchange rates and exports and imports; exchange rates still matter for trade. The findings indicate that 10% real effective exchange rate depreciation implies, on average, a 1.5% of GDP increase in real net exports.

Swarnali Ahmed, Maximiliano Appendino, Michele Ruta, 27 August 2015

The export-less depreciation of the yen has opened a debate on the power of exchange rates to boost exports. This column presents new evidence on how the exchange rate elasticity of exports has changed over time and across countries, and how global value chains have affected it. The upshot is that greater integration in global value chains makes exports substantially less responsive to exchange rate depreciations.

Pablo Druck, Nicolas Magud, Rodrigo Mariscal, 16 August 2015

The strength of the US dollar can impact the economic activity in emerging economies in various ways. This column argues that appreciation of the dollar mitigates the impact of real GDP growth in emerging markets. The main transmission channel is through an income effect. As the dollar appreciates, commodity prices fall, depressing domestic demand via lower real income, and as a result real GDP in emerging markets decelerates. Emerging markets’ growth is expected to remain subdued, reflecting the expected persistence of the strong dollar.

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