Atlantic Economic Journal

, Volume 43, Issue 2, pp 195–207

Exchange Rate, Capital Flow and Output: Developed versus Developing Economies

Article

DOI: 10.1007/s11293-015-9458-2

Cite this article as:
Kim, G., An, L. & Kim, Y. Atl Econ J (2015) 43: 195. doi:10.1007/s11293-015-9458-2

Abstract

This paper aims to study the impact of exchange rate and capital flows on output in one unifying model. To explore this issue, we apply a vector auto-regression (VAR) model with Cholesky decomposition to a group of developed economies (Canada, Switzerland, Australia, Italy, the Netherlands, and Spain) and developing economies (Mexico, Indonesia, Korea, Malaysia, Philippines, Brazil, and Chile). The sample period varies for each country with the longest for Switzerland (1970:1–2010:3) and the shortest for Chile (1996:1–2010:3). The findings suggest first that contractionary devaluation is more likely to happen in developing countries while expansionary devaluation is more prevalent in developed countries. Second, the current account tends to improve in some of the countries facing currency depreciation. However, whether output increases after a real devaluation or not has little to do with whether the current account improves or not. Third, in response to capital inflows, output in developed countries are largely unaffected, while output in developing countries generally increases.

Keywords

DevaluationContractionary effectsVAR model

JEL

F30

Copyright information

© International Atlantic Economic Society 2015

Authors and Affiliations

  1. 1.Department of EconomicsCalifornia State University, FresnoFresnoUSA
  2. 2.Department of Economics and GeographyCoggin College of Business, University of North FloridaJacksonvilleUSA
  3. 3.Department of EconomicsUniversity of KentuckyLexingtonUSA