The Macroeconomic Consequences of Exchange Rate Depreciations / Masao Fukui, Emi Nakamura, Jón Steinsson.

Format:

Book

Author/Creator:

Fukui, Masao.

Contributor:

National Bureau of Economic Research.

Nakamura, Emi.

Steinsson, Jón.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31279.

NBER working paper series no. w31279

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

We study the consequences of "regime-induced" exchange rate depreciations by comparing outcomes for peggers versus floaters to the US dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is not associated with an increase in net exports, or a fall in nominal interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We develop a financially driven exchange rate (FDX) model in which multiple shocks originating in the financial sector drive exchange rates and households and firms can borrow in foreign currencies. Following a depreciation, UIP deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa facts, even though exchange rates have large effects on the economy.

Notes:

Print version record

May 2023.