The Macroeconomic Consequences of Exchange Rate Depreciations

Masao Fukui, Emi Nakamura and Jón Steinsson

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: Abstract We study the consequences of “regime-induced” exchange rate depreciations by comparing outcomes for peggers versus floaters to the U.S. 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, uncovered interest parity 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 fact, even though exchange rates have large effects on the economy.

Keywords: 38 Economics (for-2020); 3801 Applied Economics (for-2020); 3802 Econometrics (for-2020); 3803 Economic Theory (for-2020); 14 Economics (for); Economics (science-metrix); 3801 Applied economics (for-2020); 3802 Econometrics (for-2020); 3803 Economic theory (for-2020) (search for similar items in EconPapers)
Date: 2025-10-11
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.escholarship.org/uc/item/5wq6v1rf.pdf;origin=repeccitec (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:econwp:qt5wq6v1rf

Access Statistics for this paper

More papers in Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley Contact information at EDIRC.
Bibliographic data for series maintained by eScholarship, California Digital Library ().