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The Macroeconomic Effects of Large Exchange Rate Appreciations


Although currency adjustment is often proposed as a policy tool to reduce current account imbalances, there is no consensus regarding the macroeconomic effects. In this paper we study the macroeconomic aftermath of large exchange rate appreciations. Using a sample of 128 countries over the period 1960–2008, we identify 25 episodes of large nominal and real appreciations shocks. We use narrative identification of exogenous appreciation episodes and study the macroeconomic effects in a dummy-augmented panel autoregressive model. Our results indicate that exchange rate appreciations tend to have strong effects on current account balances. Within 3 years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, but the output costs are small and not statistically significant. All these effects appear somewhat more pronounced in developing countries.

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  1. We are grateful to two anonymous referees for very helpful comments and suggestions. We also wish to thank, without implicating, Menzie Chinn, Christian Daude, Luiz de Mello and Helen Qiao for their suggestions. All remaining errors are our own.

  2. There is an emerging consensus that global imbalances were closely linked to the 2008 crisis (Bini Smaghi 2008; Caballero and Krishnamurthy 2009; Blanchard and Milesi-Ferretti 2009; Obstfeld and Rogoff 2009), but some authors maintain that the financial crisis was largely unrelated (e.g. Dooley et al. 2009). For an empirical test of the link between imbalances and financial crises see Jordà et al. (2011).

  3. The key argument is that revaluation might put a successful export-led growth model at risk. Similar causes have been named as explaining the “fear of floating” phenomenon (Calvo and Reinhart 2002).

  4. At least outside the narrower context of appreciation pressures in resource rich economies.

  5. Not dissimilar to the approach taken by Romer and Romer (2010) to identify the effect of tax changes.

  6. For instance, the Malaysian ringgit was managed relative to the Singapore Dollar in the late 1970s. When the Singapore Dollar strengthened against the US dollar in the early 1980s, the Malaysian ringgit appreciated strongly on a trade weighted basis (both in nominal and real terms) for reasons that were by and large unrelated to Malaysia’s economic position. We consider this an exogenous appreciation event. By contrast, when the German government decided to revalue the Deutschmark in 1970, it is likely that the decision partly reflected the strength of the German economy and the strength of the external position. We consequently treat such an event as at least partly endogenous.

  7. Initially, there might be a J-Curve effect, but eventually the current account would deteriorate.

  8. Chinn and Wei (2008) demonstrate that flexible exchange rate regimes are no more effective in facilitating current account adjustment than fixed regimes.

  9. However, some authors take the opposite position and argue that the “elasticity pessimism” might have gone too far (Obstfeld 2002). In the Asian context, models that show only small adjustment effects (at best) due to sticky prices are also at odds with the rich literature on particularly high pass-through in emerging markets leading to the “fear of floating” phenomenon (Calvo and Reinhart 2002).

  10. Campa and Goldberg (1995, 1999) study the linkage between exchange rate and investment in industry in the US, Canada, UK and Japan. They find that during the 1970s appreciation generated a reduction in capital goods orders, but that the opposite pattern prevailed during the 1980s. Over a sample of Italian manufacturing firms, Nucci and Pozzolo (2001) show that a depreciation of the exchange rate can have positive effects on investment through higher revenues and a negative effect through the cost channel, but the magnitude of these effects varies significantly over time.

  11. For a useful survey see Eichengreen (2008).

  12. More generally, there is a large literature on the contractionary effects of devaluation, mostly in a developing country context, which we will not recall here (see for instance Krugman and Taylor 1978; Shi 2006, etc.). Some channels emphasised in this literature (beyond those discussed below for elasticity’s and real balance effects) have been symmetrically used in this paper for the analysis of appreciations.

  13. Detailed results are available upon request. We thank an anonymous referee for the suggestion to test the robustness of our results to a lower event threshold definition.

  14. Our main conclusions do not change if we use 90% confidence intervals. Detailed results are available upon request.

  15. We classify all those countries as developing that had a PPP adjusted income of less than one third of the US level in the year 1980.

  16. We also tested the robustness of these results to a change in the event definition. The results for the indirect events are not reported here but available from the authors upon request. The robustness check yielded very similar responses of the variables in the system.

  17. We are grateful to an anymous referee for suggesting formal testing of the difference.


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Correspondence to Edouard Turkisch.

Appendix: Data Sources

Appendix: Data Sources

  1. 1.

    Real GDP per capita in constant prices

    Angus Maddison, The World Economy: Historical Statistics, OECD, Paris 2003. The data can be found online at

  2. 2.

    Current account balance (% of GDP)

    Data are from the World Bank, World Development Indicators 2006, Washington DC.

    Taiwanese data were obtained from the Key Indicators of Developing Asian and Pacific Countries, published by the Asian Development Bank.

  3. 3.

    Gross national savings (% of GDP)

    Calculated as current price gross national savings as a proportion of current price GDP.

    Data are from International Monetary Fund (2009), World Economic Outlook Database, Washington DC. For Taiwan, see above

  4. 4.

    Investment (% of GDP)

    Calculated as current price investment as a proportion of current price GDP.

    Data are from the International Monetary Fund, World Economic Outlook Database (2009), Washington DC. Data are based on individual countries’ national accounts statistics. For Taiwan, see above

  5. 5.

    Nominal Effective Exchange Rate (NEER)

    Data are from the International Monetary Fund, International Financial Statistics (2009), Washington DC. We also used Bank for International Settlements estimates to extend the sample from 1963, when data are available.

  6. 6.

    Real Effective Exchange Rate (REER)

    Real effective exchange rate are based on relative consumer prices.

    Data are from the International Monetary Fund, International Financial Statistics (2009), Washington DC. We also used Bank for International Settlements estimates to extend the sample from 1963, when data are available.

  7. 7.

    Exchange rate regime

    We used the Reinhart-Rogoff (RR) classification of exchange rate regimes, updated by Ilzetzki, Reinhart and Rogoff (2008). We used the fine RR classification, ranging de facto exchange rate regimes from 1 to 15. For an index from 1 to 8, we classified the exchange rate regime as pegged, and from 9 to 15, we classified it as floating. For each case, we then described in greater details the appreciations, to identify episodes corresponding to our definition. We also included a small number of episodes in the broad sample when countries’ managed their exchange rates tightly in a narrow band corresponding to classification 9–11 on the RR scale.

    The classification codes are the following:


    No separate legal tender


    Pre announced peg or currency board arrangement


    Pre announced horizontal band that is narrower than or equal to +/−2 %


    De facto peg


    Pre announced crawling peg


    Pre announced crawling band that is narrower than or equal to +/−2 %


    De factor crawling peg


    De facto crawling band that is narrower than or equal to +/−2 %


    Pre announced crawling band that is wider than or equal to +/−2 %


    De facto crawling band that is narrower than or equal to +/−5 %


    Moving band that is narrower than or equal to +/−2 %


    Managed floating


    Freely floating


    Freely falling


    Dual market in which parallel market data is missing.

    Source: Ilzetzki, Ethan O., Reinhart, Carmen, and Kenneth S. Rogoff (2008) “Exchange Rate Arrangements Entering the 21st Century: Which Anchor Will Hold?” available at:

  8. 8.

    Real exports and imports

    Data are from the World Bank, World Development Indicators 2006, Washington DC.

    Taiwanese data were obtained from the Key Indicators of Developing Asian and Pacific Countries, published by the Asian Development Bank.

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Kappler, M., Reisen, H., Schularick, M. et al. The Macroeconomic Effects of Large Exchange Rate Appreciations. Open Econ Rev 24, 471–494 (2013).

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  • Current account adjustment
  • Global imbalances
  • Exchange rate adjustment
  • Real exchange rates


  • F4
  • F31
  • F32
  • N10
  • O16