Exchange Rate Fluctuations and the Macro-Economy: Channels of Interaction in Developing and Developed Countries

The paper analyzes interactions between exchange rate fluctuations and the macro-economy in a sample of developing and developed countries. The effect of currency depreciation is particularly pervasive in decreasing consumption and investment across developing countries. Given the high dependency on imported goods in developing countries, currency appreciation decreases competitiveness and, therefore, export growth without a significant negative effect on imports. The trade balance generally improves as currency depreciation boosts export competitiveness in many developing countries. In contrast, the reduction (increase) in exports with respect to currency appreciation (depreciation) may be matched by a reduction (increase) in the domestic value of imports in many industrial countries. Eastern Economic Journal (2008) 34, 190–212. doi:10.1057/palgrave.eej.9050026