Contractionary devaluation in the southern cone: The case of Chile

This paper discusses the effects of a currency devaluation on output, employment and the trade balance in a small open economy (Chile). The structure of the foreign trade sector in terms of price elasticities, the sectoral differences in relative domestic value added intensities across exports and import competing industries and the degree of wage indexation, are the main determinants, in our model, of the impact of devaluation. A simulation carried out with a computable macro model for Chile, shows a currency devaluation to be contractionary in the short to medium run.     

PoJjcy and the Australian Economy, 1977

At the end of the first quarter of 1977 the available economic indicators, while as usual far from univocal, still give cause for serious concern about the health and direction of the Australian economy. With no significant expansionary factors operating in the economy in 1977 other than the revival in the mining industry and in some aspects of business investment, and the various arms of economic policy being set almost entirely in a restrictive stance, aggregate output would appear to be either flat or declining modestly at the present time. On the basis of a continuation of present policies we would anticipate growth in real non-farm GDP of only 2 to 3 per cent in both 1976–77 and 1977–78, with unemployment continuing to increase until well into 1978. Given the stimulus to inflation arising from the 1976 devaluation and from the wage effects of the Medibank changes, the rate of increase in the consumer price index would seem likely to be 14 to 15 per cent in 1977, even if a partial wage indexation policy could be sustained and whether or not a one quarter wage/price deferment comes into effect. But government pressure on the Arbitration Commission for a reduction in real wages has placed the wage indexation system in jeopardy, and there is now considerable uncertainty about the methods of wage fixation which will obtain in 1977–78. This article surveys some aspects of recent developments and considers some policy options available to the government.     

World Agricultural Trade Reform: Implications for Australia

In this paper we assess the implications of agricultural trade reform by GATT member countries. To do this, we link two general equilibrium models, a world food trade model and the ORANI model of the Australian economy. By treating the ORANI model as an integral part of the world model, we are able to focus on the implications for Australia of world agricultural trade reform.
The findings suggest that, if price distorting agricultural policies were removed by GATT member countries, world food commodity prices would rise, some by up to 30 per cent, and world food trade expand by about a third. Australia would be a major beneficiary of these international developments, the value of its agricultural exports rising by close to 15 per cent. In 1986, this would have meant for Australia additional export earnings of around SUS750 million, as well as more rapid economic growth.     

The non-linear impact of monetary policy on international reserves: macroeconomic variables nexus

This paper employs panel smooth transition regression models to investigate the nonlinear effects of two monetary policy proxies (i.e., real exchange rate return and real interest rate differential) on the international reserves—macroeconomic variables nexus. The panel data set includes the fourteen G-20 countries during the period 1991–2012. Empirical results show that the marginal effects of the macroeconomic variables (savings, terms of trade, public debt, capital account liberalization, economic growth, and trade openness) on international reserves are non-linear and vary with time, the proxies and countries, not linear and constant derived from traditional linear model. Currency devaluation policy (against the US dollar) can non-linearly enlarge the positive contribution of trade openness and public debt on international reserves, and non-linearly reduce the negative impact of terms of trade on international reserves, as the Marshall–Lerner condition holds. Expansionary monetary policy (through the decrease in domestic interest rates) can strengthen the positive effects of public debt, trade openness, and economic growth on international reserves. The precautionary and mercantilist views of reserves holdings are partially supported.     

A simple macro model for a small open economy facing a binding external constraint (Chile)

In this paper a Keynesian macroeconomic model for a small open economy is used, which describes the functioning of the real part of the economy in the short run when facing a dominant external restriction. The main conclusions of this paper are: (1) In the Chilean case, a devaluation has a contractionary impact in the short run, i.e., a 10% real devaluation produces a 3.4% drop on the level of output. The non-fulfilment of the Marshall-Lerner condition accounts for only 30% of the output contraction, while the remaining 70% corresponds to the decline in consumption that is induced by the reduction in real wages. (2) When the economy has an external deficit, the adequate combination of exchange and fiscal policies to restore the Balance of Payments equilibrium which minimizes the decline of output depends on the magnitude of the devaluation. Thus, an ‘over-shooting’ in the exchange rate, together with a contractionary fiscal policy, would produce an unnecessarily deflationary impact in the short run. (3) The Chilean empirical evidence shows that when there is a dominant external constraint, the magnitude of the short run trade-off between real wages and employment is not very acute. The short-run elasticity of employment with respect to the real wage is 0.34.     

Exchange rate devaluation,monetary policy and wages: A general equilibrium analysis for Chile

A range of devaluation, monetary and wage policy mixes are analysed for the Chilean economy using a 10 sector comparative static model built along neoclassical lines. The model, while focusing on the real side of the economy, also contains a simple monetary sector. Quantifying the short-run implications of each policy mix for key macroeconomic and sectoral variables enables judgements to be made about the effectiveness of each mix in reaching specified targets and their feasibility. Money wage flexibility downwards is crucial if balance of trade and employment targets are to be achieved with lower domestic inflation and a smaller nominal devaluation.     

Does devaluation improve trade balance in small island economies? The case of Fiji

A number of countries, mostly small and island economies manage fixed exchange and often devalue it as a stabilisation strategy. The current paper investigates the effectiveness of devaluation in improving trade balance with reference to Fiji. A small island economy has limited exportable and hence highly depends on imports for both consumption and production purposes. A devaluation, therefore, inflates domestic price and appreciates the real exchange immediately by raising importable consumption and discouraging imports used in domestic production. The paper applies various econometric models for empirical investigation of its impact and transmission mechanism. Strong long-run relationship found between real exchange rate and trade balance explains that appreciation of currency has been responsible for the rising trade deficit in the economy. Moreover, the devaluation did not demonstrate J-curve phenomenon. The effect of devaluation strongly contributed to the domestic inflation has been while quite weak on stimulating aggregate demand.     

U.S. bilateral trade balances and the dollar

U.S. bilateral export and import values with seven large trading partners are tested for real exchange rate effects over 1975–1985. The results suggest that dollar devaluation would have the most favorable impact on the U.S. trade balance in the case of Japan and the least favorable in the case of Canada.     

Union Wage Effects and the Probability of Union Membership*

This paper uses Lee's (1978) model to determine the wage gains associated with trade union membership and the reasons individuals join trade unions in Australia The data are derived from the 1984 Australian National Social Science Survey. A major conclusion is that unions secure a 17.22 per cent wage gain for their members, other things the same. This expected wage premium is shown to have an important positive impact upon the union membership decision. The welfare loss associated with the union wage premium is argued to be relatively minor about one half of one per cent of gross domestic product     

Exchange-rate adjustments in small market and centrally planned economies

In a centrally planned economy (CPE) that has eliminated detailed central planning of output and foreign trade and introduced some domestic price flexibility and organic linkages to world-market prices, the exchange rate can take on more than an accounting function. This paper contrasts the effects of exchange-rate adjustment in such a “modified” CPE (or MCPE) with those in a market economy. There are a number of reasons why MCPE authorities might eschew devaluation as a policy instrument, despite the possibility that it would be more effective in some cases in improving the trade balance than in a market economy.     

Economic Growth and Wage Stagnation in Peru: 1998–2012

From 1998 to 2012, the Peruvian economy exhibited rapid growth. Moreover, the composition of the labor force improved in terms of education and experience, two variables that are typically associated to higher human capital. The average worker in 2012 had a higher level of education and was one and a half years older than in 1998, reflecting the impact of the demographic transition. However, the average real wage was roughly constant. We show that a decline in the wage premium for education, and to a minor extent for experience, is responsible for the lack of growth in the average real wage. Had these two premia remained constant throughout the period of analysis, average labor earnings would have increased by about 2.6% per year, of which 0.7 percentage points are accounted for by the changes in the composition of the labor force in terms of age and education. We explore the role of the relative supply of workers with different levels of human capital as an explanation for the decline in the wage premium for education. Finally, we analyze the implications of these findings for some macroeconomic variables, as earnings and wage inequality, the labor share and total factor productivity.     

A forecasting model of the Sri Lankan economy

A forecasting model of the Sri Lankan economy is developed and estimated. Both the within and post-sample tracking performances of the model are evaluated. The estimated structure is used to simulate the effects of selected exogenous shocks. The experimental results reveal that devaluation and terms of trade deterioration have contrasting implications for current account and budget deficit; and that world income growth and world inflation have opposite impacts on economic growth.     

Impacts of RMB devaluation on China’s trade balances: a time-varying SVAR approach

ABSTRACT

In this article, I empirically examine time-varying effects of real renminbi (RMB) devaluation on China’s trade balances. To this end, I estimate a time-varying structural vector autoregression model with monthly data. Results demonstrated that effects of real RMB devaluation on China’s trade balances are time varying. In a few months after devaluation of RMB, trade balances worsen as predicted in J-curve theory in most sample periods. However, subsequent improvements of trade balances predicted in J-curve theory appear only in certain periods, particularly in 2000s. Finally, devaluation of RMB positively affects China’s GDP and OECD industrial production, although the size of effects varies across sample periods. Joining WTO, the global financial crisis and endogenous feedbacks induced by price effects seem to be important to understand these time-varying patterns.     

Quantifying the Impact of Trade on Wages: the Role of Nontraded Goods

This paper uses an applied general‐equilbrium model to decompose the effects of changes in trade‐ and technology‐related variables between 1982 and 1996 in the United States on the wages of skilled and unskilled labor. The results indicate that trade‐related variables (tariff cuts, improvement in the terms of trade, and the increase in the trade deficit) had little impact on the widening wage gap. The major factor behind the rise in the skilled wage relative to the unskilled wage was differential rates of growth in skill‐biased technical change across sectors. The paper also highlights the role that nontraded goods play in explaining the wage gap. Finally, the paper presents estimates of how wages would change if the economy moved to autarky. The results show that expanding trade could actually reduce wage inequality, rather than increase it.     

Exchange Rate Pass-through: How Much do Exchange Rate Changes Affect the Prices of Australian Exports?

Australia is generally held to be a small open economy with a high proportion of commodity exports. It is therefore regarded as a 'price taker' in international markets, and pass-through on exports is expected to be zero. This paper uses the Johansen Multivariate Cointegration technique to estimate the pass-through of exchange rate changes to the destination-currency prices of aggregate Australian exports. The results demonstrate a stable long-run pass-through level of 60 per cent, which refutes the 'small-country' assumption of Australian exporters as price takers. These findings have important implications for Australia's terms of trade and current account deficit     

Currency Devaluation and Resource Mobilization: A Computable General-Equilibrium Analysis of Adjustment in Cameroon

Currency devaluations prescribed for many developing countries are usually expected to generate a growth-stimulating reallocation of resources in favor of export production. Results from a computable general-equilibrium model of devaluation in Cameroon indicate aggregate growth in export agriculture with decline in some traditional export crops and expansion in specific nontradable food crops. While agriculture and manufacturing expand after devaluation, reduced output from services and construction causes short-term contraction in aggregate output. Positive growth and trade balance effects are dependent on a major reallocation of labor which has been difficult to achieve in Cameroon.     

Economic Growth,Terms of Trade and Welfare in an Open Monetary Economy*

The authors investigate the impact of growth on terms of trade, absolute prices and welfare using a two-country, monetary model. Under flexible exchange rates export-biased growth would lead to a decline in the terms of trade if the two countries are ‘similar’. Under fixed exchange rates a weaker condition than the barter condition of export-biased growth is sufficient, namely, for the import commodity the demand creating effect of growth dominates the supply effect while for the exported commodity the opposite holds. Secondly, substitutability between money and commodities indicates that no necessary relation holds between the terms of trade and the trade balance. Thirdly, the introduction of money creates a real balance effect so that decline in terms of trade is no longer a necessary (or sufficient) condition for immiserization. Finally, the paper concludes by questioning two policy conclusions drawn in earlier models: one, that the declining terms of trade of less developed countries was due to a bias in the growth strategy and, two, that monetary models of trade support the ‘monetarist’ proposition that growth and a deteriorating trade balance can only co-exist if the domestic monetary policy is nonneutral.     

Mega‐Regional Agreements and Their Impact on Australia

This paper estimates the effects of emerging mega‐regional agreements on the economy of Australia using a Computable General Equilibrium model. Scenarios considered include the 11‐member Comprehensive and Progressive Agreement for Trans‐Pacific Partnership (CPTPP) agreement, its possible enlargement to include five additional members (‘TPP16’) and the Regional Comprehensive Economic Partnership (RCEP) currently under negotiation. The study finds that Australia stands to enjoy real income and trade gains along both the CPTPP and RCEP paths. However, since Australia is already benefiting from its own liberal trade policies and many prior trade agreements, benefits are relatively modest, typically below one per cent of real income.     

Exchange rate management and stabilization policies in developing countries

We outline three channels via which a devaluation has a direct contractionaly impact on the aggregate supply side of the economy: local currency costs of intermediate imports, wage indexing in the presence of food imports and reduced volume of real credit to firms. Contractionary effects via the supply side are more damaging than Krugman-Taylor effects via aggregate demand since a cut in aggregate supply leads to upward pressure on inflation while a cut in aggregate demand tends to abate inflation. Upward pressure on inflation may over time threaten the increase in competitiveness a nominal devaluation also intends to achieve. We also discuss the implications of a substantial foreign debt. We demonstrate that a successful devaluation raises the real (in terms of domestic goods) debt service burden, causing a Krugman-Taylor like contractionary effect on aggregate demand. We then analyse the effects of a preannounced slowdown of the rate of depreciation. Our results of course do not imply that a devaluation should never be considered. They do suggest, however, that a devaluation is likely to be an ineffective tool for demand management since it may cut aggregate supply as much or more in the short run.     

A counterfactual analysis of the Argentinian monetary transformation in 2002

A hard peg restored economic stability in Argentina during the nineties but made it also vulnerable to real shocks in so far as the economy was highly dollarized. A devaluation in 1998 in Brasil, its main partner, damaged the Argentinian competitiveness and resulted in a fall in export demand. There was a need for a real adjustment but removing the peg would have implied large balance sheet effects and raised serious financial issues. This article endeavours to learn a lesson about the aftermath of hard peg regime from the Argentinian experience. It is based on a dynamic macroeconomic model to assess the impact of three scenarios, already suggested in the literature. Two hypothetical, a floating regime and dollarization and one which was actually implemented in 2002, the pesification of the whole economy. The simulations suggest that pesification was the only scenario with unambiguous expansionary effects.