The Effects of Exchange Rate Fluctuations on Output and Prices: Evidence from Developing Countries

Abstract

The paper examines the effects of exchange rate fluctuations on real output and prices in a sample of 33 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. Anticipated exchange rate depreciation, through the supply channel, has limited effects on output growth and price inflation. Unanticipated currency fluctuations appear more significant, with varying effects on output growth and price inflation across developing countries.

The effect of currency devaluation on output: The case of ethiopian economy

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Malaysia and China: The Trade Balances, Foreign Exchanges and Crises Impacts

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The Impact of Anticipated and Unanticipated Exchange Rate Variability in Ukraine

“…Agenor's conclusions had been empirically supported using data from 23 developing countries. Kandil and Mirzaie (2003) proposed a modified AD-AS model, in which unanticipated devaluation increases aggregate demand through improvements in the trade balance, but it also increases demand for money thus restricting the supply of goods and services at the expense of higher import prices. Since unanticipated depreciation leads to a favorable price "surprise" (prices rise by more than expected), there is higher demand for labor, which translates into an increase in wages.…”

“…1 The chosen variant of the AD-AS model takes into account most important functional relationships of aggregate supply and demand as it is elaborated in several studies (Agenor, 1991;Kandil and Mirzaie, 2003;McCallum, 1996;Rojas-Suarez, 1992 , r t and r t * respectively represent GDP (income), domestic prices, and the real interest rate in the domestic country and abroad; m t is the aggregate money supply; h t is the internal component of the money supply; f t is FX assets; e t is the exchange rate (the value of foreign currency defined in the domestic currency), e t is the unanticipated exchange rate component; i t is the general price level; u t and v t are stochastic aggregate supply and demand shocks, respectively. Except for r and r * , all series are in logarithms.…”