The Asymmetric Effects of Exchange Rate Fluctuations: Theory and Evidence From Developing Countries

Magda Kandil

No 2000/184, IMF Working Papers from International Monetary Fund

Abstract: The paper examines the asymmetric effects of exchange rate fluctuations on real output and price in developing countries. The theoretical model decomposes movements in the exchange rate into anticipated and unanticipated components. Unanticipated currency fluctuations determine aggregate demand through exports, imports, and the demand for domestic currency, and determine aggregate supply through the cost of imported intermediate goods. The evidence indicates that the supply channel leads to output contraction and price inflation in the face of unanticipated currency depreciation. In contrast, the reduction in net exports determines output contraction without reducing price inflation in the face of unanticipated currency appreciation.

Keywords: WP; price inflation; demand and supply; foreign currency; government spending; Exchange rate; rational expectations; asymmetric fluctuations; currency depreciation; output contraction; price deflation; rises in the face; output price; price response; real output growth; currency price; inflation in the face; demand and supply channel; decreases price inflation; Exchange rates; Currencies; Inflation; Depreciation; Production growth (search for similar items in EconPapers)
Pages: 33
Date: 2000-11-01
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Citations: View citations in EconPapers (12)

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