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The Fallacy of Composition and Contractionary Devaluations: The Output Impact of Real Exchange Rate Shocks in Developing Countries that Export Manufactures

Robert Blecker and Arslan Razmi
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Arslan Razmi: Department of Economics, University of Massachusetts, Amherst

No 2007-02, Working Papers from American University, Department of Economics

Abstract: This paper studies whether intra-developing country price competition has significant effects on the short-run growth of output in developing countries that are specialized in manufactured exports. Regression estimates using the generalized method of moments (GMM) applied to annual panel data for 17 developing countries in 1983-2004 show that these countries exhibit a ‘fallacy of composition’, in the sense that a real depreciation relative to competing developing country exporters increases the home country's growth rate in the short run. The results also suggest that real depreciations for these developing countries relative to the industrialised countries are contractionary.

Keywords: Real exchange rates; fallacy of composition; terms of trade; manufactured exports; contractionary devaluations; competitive devaluations (search for similar items in EconPapers)
JEL-codes: F32 F43 O11 O14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2007-01
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