The Macroeconomic Consequences of Exchange Rate Depreciations

Masao Fukui, Emi Nakamura and Jon Steinsson

No 31279, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the consequences of “regime-induced” exchange rate depreciations by comparing outcomes for peggers versus floaters to the US dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is associated with a fall in net exports, and (if anything) an increase in interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We show that a large class of existing models cannot match our estimated responses and develop a model with imperfect financial openness that can. Following a depreciation, UIP deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa facts, even though exchange rates have large effects on the economy.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mfd, nep-mon and nep-opm
Note: EFG IFM ME
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