A New Approach to Currency Depreciation |
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Authors: | Ravi Batra Hamid Beladi |
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Institution: | 1. Department of Economics, Southern Methodist University, Dallas, USA;2. Department of Economics, University of Texas at San Antonio, San Antonio, USA |
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Abstract: | Currency depreciation has been studied conventionally in terms of three hypotheses—the elasticities approach, the monetary approach and the absorption approach. In this paper we offer another hypothesis called the price approach, wherein the balance of payment disequilibrium results from an inappropriate price level. Specifically, a country has a trade surplus if the equilibrium price level is below that compatible with balanced trade; by contrast, it has a trade deficit if the price level is above that compatible with balanced trade. We illustrate the price approach with the experience of currency devaluations that have occurred in emerging markets since 1997. |
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