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Economic Change and Restructuring

Erschienen in:

01.03.2008

Are devaluations contractionary in emerging economies of Eastern Europe?

verfasst von: Mohsen Bahmani-Oskooee, Ali M. Kutan

Erschienen in: Economic Change and Restructuring | Ausgabe 1/2008

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Abstract

In most developing countries currency depreciation is said to be contractionary. This is because depreciation reduces the aggregate supply more than it increases the aggregate demand. However, emerging European economies have received no attention so far, mostly due to unavailability of data. Now that enough time-series data are available, we try to fill the gap by investigating the impact of real depreciation in effective exchange rates of Belarus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Russia, and Slovak Republic on their domestic output. We find that in the short run real depreciation is expansionary in Belarus, Latvia, Poland, and Slovak Republic; contractionary in Czech Republic, Estonia, Hungary, and Russia; and has no effect in Lithuania. In almost none of the countries, the short-run effects last into the long run.

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In this paper, devaluations and depreciations are used interchangeably. The countries in our sample have adopted different exchange rate systems. At the beginning of transition period, most countries used fixed exchange rates systems, followed by more flexible exchange rates. Kočenda and Valachy (2006) provide a recent review of the development in exchange rate policies in our sample of countries.

The enlargement of the European Union continues at a speedy rate. On May 2004, 10 new members joined EU. Eight of them, namely the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia, are the former transition economies. Bulgaria, Cyprus, Malta, and Romania are the other new members. Croatia and Turkey are the candidate countries. The next round of the enlargement is expected to include the Western Balkan countries of Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia and Serbia and Montenegro.

It should be mentioned that there have been two other lines of research. Some study the issue of the pass-through of exchange rates to inflation rates in some selected emerging EU economies (see, Billmeier and Bonato 2004; Coricelli et al. 2006; Korhonen and Wachtel 2006). Other line of research examines the impact of exchange rates on exports or trade balance (see, Kemme and Teng 2000; Babetskii 2005; Égert and Morales-Zumaquero 2005; Bahmani-Oskooee and Kutan 2007).

The methodology in this section closely follows Bahmani-Oskooee and Kandil (2007). However, for a detailed and step by step explanation of the bounds testing approach see Bahmani-Oskooee and Tanku (2007).

As the Appendix shows the study period differed somewhat from one country to another due to availability of the data.

Rajan and Shen (2006) have distinguished between crisis and non-crisis periods and have shown that contractionary devaluations are more prevalent during crisis period. Our short-run results contradict that conclusion since the study period in all countries is almost a non-crisis period.

This critical value for 50 observations comes from Banerjee et al. (1998, Panel B, Table 1, p. 277). Note that comparable critical value at the 5% significance level is −4.25.

For a graphical presentation of the CUSUM and CUSUMSQ tests see Bahmani-Oskooee et al. (2005).

For more on these later points see Frankel (2005).

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Bahmani-Oskooee M, Kandil M (2007) Are devaluations contractionary in MENA countries? Appl Econ (forthcoming)

Bahmani-Oskooee M, Kutan AM (2007). The J-curve in the emerging economies of Eastern Europe. Appl Econ (forthcoming)

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Bahmani-Oskooee M, Tanku A (2007) Black market exchange rate vs. official rate in testing the PPP: which rate fosters the adjustment process. Econ Lett (forthcoming)

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Rajan RS, Shen C-H (2006) Why are crisis-induced devaluations contractionary? Exploring alternative hypothesis. J Econ Integr 21:526–550

Titel: Are devaluations contractionary in emerging economies of Eastern Europe?
verfasst von: Mohsen Bahmani-Oskooee
Ali M. Kutan
Publikationsdatum: 01.03.2008
Verlag: Springer US
Erschienen in: Economic Change and Restructuring / Ausgabe 1/2008
Print ISSN: 1573-9414
Elektronische ISSN: 1574-0277
DOI: https://doi.org/10.1007/s10644-008-9041-9

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