On the transmission of exchange rate fluctuations to the macroeconomy: Contrasting evidence for developing and developed countries

Magda Kandil

The Journal of International Trade & Economic Development, 2006, vol. 15, issue 1, 101-127

Abstract: The paper examines channels of interaction between exchange rate shifts and the macroeconomy. Exchange rate shifts are differentiated into anticipated and unanticipated components. Each component affects the demand and supply sides of the economy. Primarily, exchange rate shifts determine export competitiveness and the cost of imported inputs. The evidence reveals a relatively more important role for the cost channel in determining the real and inflationary effects in developing countries, compared with developed countries. Currency appreciation (depreciation), both anticipated and unanticipated, results in an increase (decrease) in output growth and a reduction (an increase) in price inflation in many developing countries. This evidence indicates the adverse effects of currency depreciation on macroeconomic performance in developing countries. Exchange rate policy should not be used to raise export competitiveness without considering the need for structural reforms in developing countries.

Keywords: Exchange rate; anticipated vs. unanticipated shocks; demand and supply channels; developing vs. developed countries (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1080/09638190500525795

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