Journal of Asian Economics 34 (2014) 2741

Contents lists available at ScienceDirect

Journal of Asian Economics

Is devaluation expansionary or contractionary: Evidence

based on vector autoregression with sign restrictions
Lian An a,*, Gil Kim b, Xiaomei Ren c
a

Department of Economics and Geography, Coggin College of Business, University of North Florida, Jacksonville, FL 32224, United States
Department of Economics, California State University, Fresno, United States
c
Reliant Energy, 1201 Fannin Street, Houston, TX 77002, United States
b

A R T I C L E I N F O

A B S T R A C T

Article history:
Received 28 November 2012
Received in revised form 4 March 2014
Accepted 15 March 2014
Available online 25 April 2014

The purpose of the paper is to examine the impact of real exchange rate changes real
devaluation or real depreciation on outputs in 16 countries that fall within one of the
three groups: Latin American countries, Asian countries, and non-G3 developed countries.
For the rst time in the contractionary devaluation literature, the analysis is based on a
Vector Autoregression (VAR) model with sign restrictions method by Uhlig (2005) and Fry
and Pagan (2011). The exchange rate shock is identied by imposing restrictions on the
signs of impulse responses for a small subset of variables. The ndings are as follows: (1)
whether output increases after a real devaluation or not has little to do with whether the
current account improves or not; (2) Latin American countries are quite homogenous in
that the current account generally improves while output decreases after real devaluation;
and (3) contractionary devaluation could happen in developed countries as well as in
developing countries.
2014 Elsevier Inc. All rights reserved.

JEL classication:
F31
F41
Keywords:
Contractionary devaluation
Vector autoregression
Sign restrictions

1. Introduction
Research on the relationship between the exchange rate and output is an important topic that has been the subject of an
extensive debate for a long time. The conventional wisdom on the exchange rate-output nexus is that a competitive
exchange rate encourages exports and hence, encourages growth. However, much of the empirical evidence usually suggests
the contrary. According to Kamin and Klau (1998), many developing countries have tended to resist devaluation, because
such policy would be contractionary, rather than expansionary. For example, depreciation of the Mexican peso has been
consistently associated with decline in output, while appreciation has been linked to expansion (Kamin & Klau, 1998).
Therefore, one natural question to be raised: is devaluation contractionary or expansionary after all?
The importance of understanding the effect of devaluation on output cannot be ignored, as it provides important policy
insights. For example, in a textbook model, adverse external shocks lead to a depreciation of the real exchange rate that, by
stimulating net exports, boosts aggregate demand and offsets the effects of the initial shock. If devaluation is genuinely
contractionary, the benets of exchange rate exibility may be overrated. In addition, contractionary devaluation may pose a
dilemma to policy-makers seeking to achieve simultaneously both high output growth and a strong balance-of-payment
position. It is of great signicance to understand the nexus between exchange rate and output.

* Corresponding author. Tel.: +1 8594202878.

E-mail address: lian.an@unf.edu (L. An).
http://dx.doi.org/10.1016/j.asieco.2014.03.003
1049-0078/ 2014 Elsevier Inc. All rights reserved.

28

L. An et al. / Journal of Asian Economics 34 (2014) 2741

Is devaluation contractionary or expansionary? In the context of AD-AS model of a typical textbook, the devaluation of the
domestic currency makes foreign goods and services more expensive relative to domestic in the short-run, which will cause
an upward shift in the aggregate demand curve and an expansion of output, all else being equal (see Edwards, 1989; Frankel,
1988; Goldstein & Khan, 1985). In addition, when a countrys currency depreciates in real terms, foreign rms will nd that
the country with currency depreciation can supply intermediate production inputs more cheaply. Because the economy has
been globalized with multinational rms, rms can shift their production to the country with currency depreciation for
lower production cost.1 As a result, the country with depreciation might have an increase of demand for their labor and
output (Krugman et al., 2009, p. 424), and thus increase of output. Empirical studies, such as Goldstein and Khan (1985) and
Gylfason and Schmid (1983), also provide evidence of the expansionary devaluation in the short- and medium-run for a
number of countries.
However, an opposing opinion contends that devaluation can have adverse effects on domestic output if contractionary
effects outperform expansionary demand-side effects (Cooper, 1971; Diaz-Alejandro, 1963; Krugman & Taylor, 1978). The
contractionary effects of devaluation may occur from the demand side, supply side, and balance-sheet side effects. First, if the
price elasticities of demand for exports and imports are too low, or if the country faces an initial large trade decit, according to
the monetary model, the domestic price level will increase due to higher prices of imported goods and thereby the real money
balance is lowered and aggregate demand is reduced (Frenkel & Johnson, 1976). Second, if there is redistribution of income from
a low saving group (wage) to a high-saving group (prot), aggregate demand will be reduced (Krugman & Taylor, 1978). Third,
devaluation can be contractionary if government revenues are increased (Krugman & Taylor, 1978). Fourth, devaluation raises
the price of imported intermediate goods and results in an upward shift in the aggregate supply (see the works of Findlay &
Rodriguez, 1977; Sachs, 1980, and etc.), which may result in decreased output. Fifth, as argued by Cooper (1971) and Lizondo
and Montiel (1989), real devaluation may increase the real domestic currency value of the countrys foreign liabilities, which
results in a contraction in aggregate demand. Sixth, devaluation often triggers capital outow and acts as a caveat on foreign
borrowings, which will induce a decline in consumer spending and investor condence in the domestic economy. Lastly, central
banks may be depleted of foreign reserves, which is likely to have a contractionary effect on output. Therefore, whether
devaluation is contractionary or expansionary depends on two opposing forces.
Empirical studies also produce conicting evidence on the connection between output and devaluation. For example,
Kwan (1994) nds that currency devaluation appears strongly expansionary in East Asian countries, while reviews by Kamin
and Rogers (2000) and Upadhyaya, Dhakal, and Mixon (2000) indicate that devaluation almost uniformly results in reduced
output without signicant evidence for subsequent reversal. Upadhyaya and Upadhyay (1999) and Edwards (1986) nd the
effects of devaluation to be neutral in the long run. Although many studies nd that contractionary devaluation is more
prevalent in developing countries, Kamin and Klau (1998) show that contractionary devaluation applies to other developed
economies. In addition, Bahmani-Oskooee and Kandil (2009) nd that the expansionary effect of unanticipated depreciation
is only transitory on output growth, while unanticipated depreciation is found to have a contractionary effect on output
growth in the long-run via an increase in the cost of imported inputs. Different results might be due to different countries,
different model specications, and data spans.
The purpose of this paper is to investigate the empirical relationship between output and devaluation for 16 countries:
Mexico, Brazil, Argentina, Chile, Korea, Malaysia, Indonesia, the Philippines, Australia, Canada, Denmark, Austria,
Switzerland, the Netherlands, New Zealand, and Portugal. While the choice of countries is mostly dictated by data
availability, we strive to make the sample as diverse as possible. The sample is large enough to be divided into three groups:
Latin American countries (Mexico, Brazil, Argentina, and Chile), Asian countries (Korea, Malaysia, Indonesia, and the
Philippines), and non G-3 developed countries (Australia, Canada, Denmark, Austria, Switzerland, the Netherlands, New
Zealand, and Portugal). The sample countries also encompass different exchange rate regimes. For example, Latin American
and Asian countries have alternated between xed and oating exchange rate regime but generally have had xed regimes.
Australia, Canada, Switzerland, and New Zealand have oating exchange rate regime for most of the sample time period,
while Austria, the Netherlands and Portugal belong to the Euro area. Denmark, which is in European Union (EU) but does not
adopt Euro, xed its currency, the Krone, to the Euro from 1999.2 Studying a sample of countries as diverse as this allows a
direct comparison of the output-exchange rate relationship across different groups of economies, and enables us to study if
contractionary devaluation is particular to a certain group of countries. Germany, Japan, and the US are not included, because
the economies of these countries are large enough to inuence many of the external control variables.
A fairly comprehensive vector autoregression (VAR) model is used, as it allows consideration of the endogeneity of the
exchange rate. Many past studies that have adopted VAR models, such as Kamin and Rogers (2000), Kim and Ying (2007),
Ahmed, Gust, Kamin, and Huntley (2002), and Shi (2006), have resorted to the Choleski decomposition to identify the shocks.
For the rst time in the devaluation output literature, the VAR model based on the sign restriction approach is employed.
There are several advantages in using the sign restriction approach. First, compared with the traditional structural VAR
model, restrictions that are often used implicitly, consistent with the conventional view, are made more explicit in the sign

1
For example, the German auto manufacturer BMW can shift production from Germany to its US plant if dollar depreciation lowers the relative cost of
production in the US (Krugman, Obstfeld, & Melitz, 2009, p. 424).
2
Devaluation usually applies to exchange rate changes under a xed exchange rate regime. For the countries in this study, some of them maintained a
oating exchange rate. In this paper, we use devaluation and depreciation interchangeably.

L. An et al. / Journal of Asian Economics 34 (2014) 2741

29

restriction approach. Second, sign restrictions are weak in the sense that they do not lead to exact identications of the
reduced form VAR. We regard this as an important advantage, because it circumvents incredible zero restrictions on the
contemporaneous and the long-run impact of shocks. Peersman (2005) nds that impulse responses based on traditional
zero restrictions can be considered as a single solution of a whole distribution of possible responses that are consistent with
the imposed sign constraints. Third, the sign restriction method involves the Bayesian Monte Carlo procedure. According to
Sims (1988), the Bayesian method is applicable irrespective of whether or not the variables are nonstationary, thus obviating
the need for pre-testing the variables for unit roots. In sum, results from the sign restriction approach can provide an
important complementary method of analysis, which is automatically systematic and can be universally applied.
As a preview to the results, this paper has the following ndings: (1) whether output increases or not after a real
devaluation has little to do with whether the current account improves or not; (2) Latin American countries are quite
homogenous in that the current account generally improves while output decreases after real devaluation; and (3)
contractionary devaluation could happen in developed countries as well as in developing countries.
The paper is organized as follows: Section 2 provides bivariate data analysis between the real exchange rate and output
for each country. Section 3 presents a comprehensive VAR model with the discussion of the sign restrictions methodology.
Estimation results and robustness checks are reported in Sections 4 and 5, respectively. The paper concludes in Section 6.

2. Bivariate data analysis

It is well-known from macroeconomic data that output and real exchange rate exhibit a feedback relationship, and there
is no clear-cut consensus on the relationship. On the one hand, real exchange rate depreciation could be both expansionary
and contractionary on output. On the other hand, real output growth could cause real exchange rate to appreciate or
depreciate. According to the BalassaSamuelson effect, in fast-growing economies, the relative price of nontradable goods
would rise faster and thus lead to appreciation of the real exchange rate over time. However, existing empirical studies seem
to suggest that the growth effects on real exchange rates are nonexistent or small (see Tica & Druzic, 2006, for a
comprehensive survey on the empirical evidence).
This paper rst evaluates the bivariate relationship between real exchange rates and seasonally adjusted GDP using cross
correlations with leads and lags of up to four quarters. To make the results robust to the method of detrending, this paper
employs three lters: linear detrending, rst difference, and the HodrickPrescott lter.
Table 1 reports the representative short-term cross correlations between real exchange rates and output at lags 4, 2, 0,
2, 4. A positive (negative) lag indicates the number of quarters by which the real income leads (lag) the real exchange rate.
The possible effects of devaluation on output can be gleaned from correlation at negative lags while correlation at positive
lags suggests the possible reverse causation effect of output growth on real exchange rates. We use real effective exchange
rate, which is constructed in a way that a decrease reects a real appreciation of the domestic currency.
Correlations at negative lags are clearly negative in the four Latin American countries. That is to say, depreciation of real
exchange rate is followed by a cyclical downturn, consistent with the fact that the contractionary devaluation hypothesis has
received surprisingly strong empirical support in the context of Latin American countries (Kim & Ying, 2007). For example,
real devaluations are uniformly associated with recessions and real appreciations with expansions in Mexico (see Kamin &
Rogers, 2000). As for the East Asian countries, the evidence is mixed: In Korea and Indonesia, depreciation of real exchange
rates is followed by output growth; while in Malaysia and the Philippines, depreciation is associated with output
contraction. The evidence is murky for non-G3 developed countries, which is quite sensitive to the mechanism of detrending.
The cross correlation at positive lags, which summarizes the effect of output growth on real exchange rates, are
unanimously negative for Latin American countries. This concurs with the phenomenon of the BalassaSamuelson effect that
income growth precedes the appreciation of real exchange rate. However, this does not necessarily mean that the Balassa
Samuelson effect is present as the relationship maybe due to spurious correlation. For Asian and developed countries, the
evidence is divided, rendering minor evidence for the BalassaSamuelson effect, if any. Korea particularly has ve out of six
positive correlations and Switzerland has six positive correlations, indicating that real exchange rate does not appreciate
despite the rapid catching-up.
To further explore the bivariate relationship, Granger Causality tests are carried out. Foreign income, foreign interest rate,
current account, and real money supply are included to control external inuences that affect both real exchange rate and
output simultaneously.3 In all regressions, four lags are employed.
Table 2 reports the results. In Latin American countries, causality runs from the real exchange rate to output in Mexico
and Brazil. For Argentina and Chile, causality runs in both directions. For Asian countries, the causality generally runs from
the real exchange rate to real income with Malaysia observing bilateral causality. As for the developed countries, it is very
interesting to note that there is unanimous lack of causality in both ways, except that Switzerland and New Zealand have
evidenced causality from real exchange rates to output. In general, for the three groups of countries, the results indicate that
lags of real output do not help to explain movements in real exchange rates, but lagged real exchange rates help to explain
the movement of real outputs to some extent.

The description of the data is in Appendix A.

L. An et al. / Journal of Asian Economics 34 (2014) 2741

30

Table 1
Cross correlations between exchange rate and output.
Lag

4

2

Mexico

LT
DIF
HP

0.24
0.10
0.04

0.01
0.11
0.32

0.10
0.35
0.62

0.12
0.17
0.54

0.05
0.06
0.20

Brazil

LT
DIF
HP

0.23
0.01
0.08

0.21
0.08
0.11

0.22
0.04
0.04

0.17
0.03
0.12

0.13
0.10
0.26

Argentina

LT
DIF
HP

0.11
0.04
0.15

0.12
0.2
0.35

0.07
0.22
0.45

0.02
0.09
0.15

0.12
0.02
0.04

Chile

LT
DIF
HP

0.25
0.11
0.11

0.18
0.23
0.35

0.14
0.16
0.35

0.06
0.03
0.18

0.37
0.12
0.06

Korea

LT
DIF
HP

0.27
0.06
0.11

0.21
0.00
0.09

0.16
0.30
0.29

0.16
0.04
0.13

0.16
0.08
0.05

Malaysia

LT
DIF
HP

0.19
0.07
0.26

0.21
0.17
0.44

0.25
0.26
0.54

0.28
0.13
0.39

0.34
0.04
0.07

Indonesia

LT
DIF
HP

0.56
0.02
0.22

0.51
0.24
0.15

0.41
0.01
0.26

0.33
0.13
0.48

0.29
0.05
0.31

Philippines

LT
DIF
HP

0.30
0.14
0.18

0.24
0.07
0.02

0.19
0.01
0.03

0.16
0.01
0.01

0.11
0.08
0.01

2

4

Australia

LT
DIF
HP

0.25
0.10
0.01

0.22
0.03
0.11

0.16
0.13
0.15

0.07
0.03
0.05

0.03
0.01
0.11

Canada

LT
DIF
HP

0.08
0.07
0.12

0.06
0.01
0.01

0.05
0.14
0.18

0.01
0.10
0.20

0.11
0.05
0.07

Denmark

LT
DIF
HP

0.17
0.07
0.09

0.14
0.03
0.05

0.11
0.04
0.02

0.07
0.02
0.04

0.02
0.03
0.10

Austria

LT
DIF
HP

0.13
0.03
0.06

0.12
0.08
0.10

0.14
0.01
0.06

0.12
0.10
0.04

0.07
0.07
0.10

Switzerland

LT
DIF
HP

0.24
0.07
0.07

0.38
0.02
0.11

0.52
0.13
0.39

0.53
0.33
0.53

0.41
0.16
0.35

Netherlands

LT
DIF
HP

0.19
0.12
0.03

0.14
0.03
0.16

0.07
0.14
0.30

0.07
0.03
0.22

0.04
0.04
0.10

New Zealand

LT
DIF
HP

0.18
0.01
0.03

0.23
0.07
0.08

0.26
0.05
0.10

0.24
0.05
0.08

0.21
0.01
0.04

Portugal

LT
DIF
HP

0.30
0.16
0.32

0.28
0.00
0.11

0.23
0.11
0.12

0.24
0.11
0.15

0.19
0.00
0.07

Lag

Source: Authors calculations.

Note: LT denotes linear detrending, DIF denotes rst difference, and HP denotes HodrickPrescott lter. A positive (negative) lag indicates the
number of quarters by which the real income leads (lag) the real exchange rate.

3. The VAR model with sign restrictions

The section comprises two parts. The rst part sets up the baseline model. The second part illustrates the implementation
of the sign restriction approach.

L. An et al. / Journal of Asian Economics 34 (2014) 2741

31

Table 2
Granger causality tests between real exchange rate and output.
LT

DIF

HP

Mexico

RX GC Y
Y GC RX

6.05 (0.00)
0.71 (0.59)

6.07 (0.00)
0.52 (0.72)

6.90 (0.00)
1.07 (0.37)

Brazil

RX GC Y
Y GC RX

1.39 (0.24)
0.73 (0.58)

2.71 (0.04)
0.84 (0.50)

2.19 (0.08)
0.50 (0.74)

Argentina

RX GC Y
Y GC RX

2.69 (0.03)
1.57 (0.19)

0.76 (0.55)
2.21 (0.07)

1.18 (0.32)
2.39 (0.05)

Chile

RX GC Y
Y GC RX

3.25 (0.01)
5.49 (0.00)

2.53 (0.04)
4.35 (0.00)

2.13 (0.08)
4.77 (0.00)

Korea

RX GC Y
Y GC RX

2.75 (0.04)
1.19 (0.32)

3.38 (0.01)
0.21 (0.93)

1.75 (0.14)
0.59 (0.67)

Malaysia

RX GC Y
Y GC RX

5.33 (0.00)
2.09 (0.09)

2.07 (0.09)
3.06 (0.02)

4.76 (0.00)
3.37 (0.01)

Indonesia

RX GC Y
Y GC RX

11.11 (0.00)
2.33 (0.06)

11.29 (0.00)
1.24 (0.30)

11.74 (0.00)
0.54 (0.71)

Philippines

RX GC Y
Y GC RX

2.60 (0.04)
2.15 (0.08)

2.49 (0.05)
1.34 (0.26)

1.74 (0.14)
1.14 (0.34)

Australia

RX GC Y
Y GC RX

0.89 (0.47)
0.20 (0.94)

0.16 (0.96)
0.45 (0.77)

0.18 (0.95)
0.13 (0.97)

Canada

RX GC Y
Y GC RX

1.10 (0.36)
0.88 (0.48)

0.20 (0.94)
0.50 (0.73)

0.25 (0.91)
1.18 (0.32)

Denmark

RX GC Y
Y GC RX

0.77 (0.54)
0.83 (0.51)

0.77 (0.54)
0.54 (0.71)

0.82 (0.51)
0.59 (0.67)

Austria

RX GC Y
Y GC RX

0.44 (0.78)
0.63 (0.64)

0.70 (0.59)
0.64 (0.64)

0.32 (0.87)
0.58 (0.68)

Switzerland

RX GC Y
Y GC RX

7.27 (0.00)
0.66 (0.69)

7.78 (0.00)
0.84 (0.50)

8.81 (0.00)
0.33 (0.86)

Netherlands

RX GC Y
Y GC RX

0.71 (0.58)
0.29 (0.88)

0.87 (0.48)
0.69 (0.60)

0.97 (0.43)
0.11 (0.98)

New Zealand

RX GC Y
Y GC RX

3.16 (0.02)
0.46 (0.76)

1.58 (0.18)
0.29 (0.88)

2.80 (0.03)
0.34 (0.85)

Portugal

RX GC Y
Y GC RX

0.65 (0.63)
1.30 (0.27)

0.19 (0.95)
0.94 (0.44)

0.10 (0.98)
0.51 (0.73)

Source: Authors calculations.

Note: Reported are F-statistics with P values inside the parentheses. LT denotes linear detrending, DIF denotes rst difference, HP denotes
HodrickPrescott lter. RX denotes real exchange rates, Y denotes real outputs, and GC denotes granger cause. RX GC Y tests the hypothesis that
the real exchange rate granger causes real income. Y GC RX tests the hypothesis that real income granger causes the real exchange rate.

3.1. Model setup

The documented relationships either positive or negative between real output and real exchange rates in the previous
section might arise due to spurious correlation, where both variables are affected by some third factor. For example, sharp
changes in oil prices may depress output and depreciate the real exchange rate, causing them to move in opposite directions.
In Asian and Latin American countries, large capital inows lead to a temporary boom and real appreciation. Thus, it is
important to have a control for macroeconomic conditions and to separate exchange rate changes that may be classied as
exogenous policy shocks from those that are reactions to macroeconomic events.
This paper designs a comprehensive VAR model, consisting of ve endogenous variables: current account (CAR),
measured as a ratio to GDP; price level (CPI); real effective exchange rate (REER), denominated as units of domestic good per
unit of foreign good; real output (Y), measured by the index of seasonally adjusted GDP; and real money supply (MS). In
addition, two exogenous variables, foreign income (Y*) and foreign interest rate (R*), are incorporated to capture the external
shocks. The US 3-month treasury bill rate and the US real GDP are used as foreign interest rate and income.
Real money supply is included. According to Shahbaz, Islam, and Aamir (2012), money supply affects investment and
output. An increase in money supply lowers interests, reduces borrowing costs, and promotes investment which might
enhance domestic output. In addition, a higher money supply will reduce the value of currency. Thus, we include money
supply in the model. This paper also incorporates the price level to control for the price environment for an economy.
According to Meja-Reyes, Osborn, and Sensier (2010), an inationary environment may affect output negatively because it

32

L. An et al. / Journal of Asian Economics 34 (2014) 2741

might provoke inefcient allocation of resources due to distortions in relative prices and higher administration costs for
rms. Current accounts are included for two reasons. On the one hand, it allows direct investigation of the effect of exchange
rate uctuation on output through the demand channel (net exports).4 On the other hand, the current account incorporates
information of capital ows implicitly, because current accounts and capital accounts are mirror images of each other. The
information on capital ows is very important. According to Kamin and Rogers (2000), shocks to capital ow have been
important to movements in the real exchange rate and output for Mexico. Reinhart (2000) also maintains that, devaluation
can lead to a loss of access to international capital markets and, thus, generate contractionary effects on output. Kim and Ying
(2007) also include this variable in their model. The US short-term interest rate and real GDP are included to capture
international markets conditions. According to Meja-Reyes et al. (2010), including the US interest rate and GDP can proxy for
the US (or international) business cycle, and export-led growth in Latin American or Asian countries depends upon
international economic conditions. As the focus of this paper, real output and exchange rate are naturally included.
The data set is quarterly and has been primarily collected from International Financial Statistics (IFS), Direction of Trade
Statistics (DOTS), Department of Statistics and from central banks for each country. The sample periods are generally from
1973:1 to 2012:4, except for Brazil (1980:1-2011:4), Canada (1973:1-2012:1), Denmark (1975:1-2012:1), Korea (1976:12012:1), Indonesia (1980:1-2012:4), Mexico (1985:4-2012:4), and Philippines (1973:1-2011:4). Appendix A lists the details
of the data sources and the sample periods.
Eq. (1) summarizes the model in a compact reduced form:
2 3
2
3 2 3
2
3
e1t
a1
CARt1
CARt
27
6 CPIt 7 6 a2 7
6 CPIt1 7

 6
e
6
7

6
7 6 7
6
7
6 t3 7
6 Yt
7 6 a3 7 Ai j L6 Y t1
7 Bi j L DYt1

(1)
6 et 7

6
7 6 7
6
7
DRt1
6 47
4 REERt 5 4 a4 5
4 REERt1 5
4 et 5
MSt
a5
MSt1
e5t
All the variables are in log except the interest rate and the ratio of current account to GDP. There are several features of the
model. First, the VAR model controls for both internal and external shocks that might simultaneously induce devaluation and
economic contraction, such as a reversal of capital inow or a decline in foreign country GDP, leading to a spurious
correlation between the two variables. Second, while we tried to be comprehensive in controlling for various factors,
parsimony is also sought. For example, we do not include the capital account as in Kim and Ying (2007). Because current
accounts and capital accounts are mirror images of each other, including both variables will include redundant information.
Third, instead of using nominal exchange rate as in Kim and Ying (2007), this paper chooses to use real exchange rate. In the
long run, nominal devaluations are believed to lead to a proportionate increase in prices that leave real exchange rates and
economic activity unchanged, analysis based on nominal exchange rate has been usually conned to short-run effects (see
Lizondo and Montiel, 1989). Furthermore, an essential element in the traditional view of devaluation is that it is the
improvement in the domestic relative price of tradables to nontradables, that is, real exchange rate depreciation, generates
the process of expenditure-switching, balance-of-payments improvement and economic expansion.
3.2. Implementation of the sign restrictions
Disagreements start when researchers discuss how to decompose the prediction errors into economically meaningful
fundamental innovations, that is, how to identify the structural shocks. Five methods are present in the literature, four of
which are parametric restrictions. These parametric restrictions can vary according to whether particular variables appear,
whether there is recursive causal structure (Sims, 1988), and whether the shocks have known short-run or long-run effects
or some combination (see Blanchard & Quah, 1989). Each type has its own disadvantages as well as advantages. For example,
there is no clear consensus about the ordering, and some ordering may not be justied by the economic structure, and the
standard recursive identifying assumptions may be over-identifying restrictions that have been developed over time in a
data-mining like manner as researchers looked for restrictions that can provide sensible results (see Rudebusch, 1998). The
zero contemporaneous impact may not be consistent with a large class of general equilibrium models (Canova & Pina, 1999).
In addition, Faust and Leeper (1997) show that substantial distortions in the estimations are possible due to small sample
biases and measurement errors when using zero restrictions in long-run effects.
As an alternative, this paper pursues the recent sign restriction approach by Uhlig (2005) to identify exchange rate shocks
with the median response calculated by Fry and Pagan (2011). Uhlig (2005) suits best here for two reasons. First, Uhlig (2005)
does not aim at a complete decomposition of the one-step-ahead prediction errors into all components due to underlying
structural shocks, but rather concentrates on identifying only one shock. The intention is to be minimalistic and to impose
not much more than the sign restrictions themselves, as they can be reasonably agreed upon across many economists. In this
paper, our primary interest is to obtain evidence on how exchange rate devaluation affects output. Instead of identifying all
structural disturbances, this paper uses minimal restrictions that are sufcient to identify the depreciationary exchange rate
shock and examines its effect on the output. As such, this paper circumvents the incredible zero restrictions on the

4
Trade balance is the dominant part of the current account in other countries, except for the Philippines, whose income balance is the main component of
the current account balance.

L. An et al. / Journal of Asian Economics 34 (2014) 2741

33

contemporaneous and long-run impact of shocks. Second, given the nature of multi-country study, data availabilities
differ across countries. The use of the Uhlig (2005) sign restrictions identication methodology allows for a very
similar identication to be achieved across countries despite these data problems. This is because the sign restriction
identication strategy identies shocks using mild restrictions on multiple time-series, and because the sign restrictions
put no quantitative restriction on the responses, it does not matter which denition of the variable is used
(see Raq & Mallick, 2008). In addition, compared with the traditional structural VAR model, restrictions which
are often used implicitly, consistent with the conventional view, are made more explicit in the sign restriction
approach.
Nonetheless, it is important to note that sign restrictions are not without criticism. For example Fry and Pagan (2011)
have cast doubt with regard to the shocks identied and the optimal responses using median criteria. Specically, with
identifying only one shock, that is, exchange rate shocks, combinations of other shocks could potentially look like exchange
rate shocks. One way to avoid this problem would be to identify other shocks explicitly. According to Uhlig (2005), the
multiple shocks problem is not particular to the sign restrictions method. For example, if the true data generating
mechanism have more shocks than variables, and if one uses a conventional Cholesky decomposition to identify an exchange
rate shock by ordering it last, then the shocks identied will actually be a linear combination of several underlying shocks. In
sum, this paper does not claim that the identifying assumptions are ironclad or perfect, but rather they are particularly
reasonable, minimal and neat.
Fry and Pagan (2011) point out that the optimal response using median criteria for different shocks and horizons may
combine information from several identication schemes and thus is a composite of different structural response functions.
They propose an alternative method to overcome this problem by choosing a response as close as possible to the median
while imposing that the responses are generated from one single identifying matrix, termed as median target method. As
such, this paper employs the Uhlig (2005) method to identify the exchange rate and uses the Fry and Pagan (2011) method to
calculate the median response. We term this as the Uhlig (2005)FryPagan (2011) method.
In the following, we provide a brief review of the method. The detailed methodology can be found in Uhlig (2005). Let Yt
be a vector of n endogenous variables containing time-t values whose dynamic relationships are described by the following
vector autoregression of order k (VAR(k)):
Y t B1 Y t1 B2 Y t2    Bk Y tk V t ;

t 1; . . . ; T;

(2)

where B(k) are coefcient matrices of size n  n and Vt is the one step-ahead prediction error with variancecovariance matrix
S. Let Wt be an n  1 vector containing time-t values of structural disturbances. The reduced-form residuals and structural
disturbances are linked through:
V t AW t

(3)

where it is assumed that the structural disturbances are mutually independent and normalized to be of variance 1: it can
therefore be written as EW t W 0t  I. In addition, the jth column of A (or its negative) represents the immediate impact on all
variables of the jth structural innovation one standard error in size. The only restriction on A thus far that emerges from the
covariance structure is:
AA0 S

(4)

the identication problem amounts to uncovering the n(n  1)/2 free elements in A by imposing identifying restrictions.
According to Uhlig (2005), the matrix A can always be written as:
A X ^Q

(5)

where X is an orthogonal matrix whose columns are the orthonormal eigenvectors of S, ^ denotes a diagonal matrix with the
eigenvalues of S on its principal diagonal, and Q denotes some orthogonal matrix (i.e., QQ0 = I). Eq. (5) shows that choosing
elements in an orthonormal set can determine the free elements in A. As we are only interested in responses to one particular
shock, the exchange rate shock, the problem amounts to determining an orthonormal vector q in the following equation:
1=2

aX^q

(6)

where a is a column of A, termed as impulse vector by Uhlig (2005), containing the contemporaneous responses of n
endogenous variables to the exchange rate shock, and q is a column of Q in the corresponding location. The main idea of the
identication scheme is to impose a set of inequality constraints. This does not uniquely identify a but supports ranges of
possible responses consistent with the sign restrictions.
For each set of the estimates for (B, S), we can compute impulse vectors and hence impulse response functions
corresponding to different unit vectors in an n-dimensional sphere. We generate n numbers from a normal distribution with
mean zero and standard deviation one, treat them as coordinates, and normalize the resulting vector into a unit vector. The
normalized n-dimensional vector corresponds to each point on the sphere. We can repeatedly generate n-dimensional
vectors to uniformly cover the sphere.
The sampling uncertainty about the VAR parameters (B, S) is covered in a Bayesian manner. Following Uhlig (2005), we
assume that prior and posterior distributions for (B, S) belong to the Normal-Wishart family. We simulate 500 pairs of

34

L. An et al. / Journal of Asian Economics 34 (2014) 2741

(B, S). For each pair, we evaluate 500 unit vectors on the n-dimensional sphere. Thus a total of 250,000 qs and impulse
vectors are evaluated. After computing each set of the impulse response functions corresponding to each unit vector, we
check if the sign restrictions are satised. Only the impulse vectors that meet the following restrictions are stored:
1. The price level does not decrease (0) in response to a positive exchange rate shock, that is, exchange rate depreciation,
because the price level is likely to be driven up by an increase in net export due to the exchange rate depreciation. See
Ahmed et al. (2002) for more discussion.
2. By denition, the exchange rate will not decrease (0) in response to its own positive shock.
3. The real money supply does not increase (0) facing exchange rate depreciation. There are two reasons. First, when the
price level increases in response to the exchange rate depreciation, the real money supply will fall. Second, as the exchange
rate depreciates, central banks will tend to decrease the money supply to support the currency. As an example, Rogers and
Wang (1995), among many others, nd empirically that real exchange rate depreciation lead to signicant decrease in
money supply. In a similar spirit, Farrant and Peersman (2006) impose that the interest rate differential does not fall after
an exogenous depreciation of the exchange rate.
These restrictions seem reasonable as they only make use of a priori appealing and consensual views about the effects of
exchange rate shocks on price, exchange rate, and money supply. Because the response of output is the focus of the paper, we
leave it unrestricted to let the data determine it. The current account is left unrestricted because it reects the response of
trade balance to the exchange rate. Therefore, the method remains agnostic with respect to the responses of the key variables
of interest. However, one degree of the choice remains: the horizon K for the sign restrictions. We follow the convention of
setting K = 2, and leave other possible values of K for robustness check.5
4. Results
Figs. 1 and 2 present the impulse responses of current account and real output to a one-standard-deviation positive
exchange rate shock (indicating depreciation) in each country over 48 quarters.6 The median target responses in each chart
with 16 percent and 84 percent quintiles are plotted.
As shown in Fig. 1, in Latin American countries, the current account generally improves for the rst 48 quarters
after the exchange rate depreciation, which is consistent with the conventional view that the depreciation of real
exchange rate increases the trade balance by making domestic goods more competitive. In Asian countries, the current
account improves in the Philippines and Indonesia. More interestingly, the current accounts in Malaysia and Korea
exhibit the phenomenon known as J-curve, that is, in response to exchange rate depreciation, the current account rst
worsens (marginally signicantly for Malaysia) before improving and eventually reaching the long-run equilibrium. In
the developed countries, the current account improves signicantly in Canada, Switzerland, Austria (marginally
signicant), while it decreases signicantly in Australia, New Zealand, and Portugal. There is no signicant change in
Denmark or the Netherlands.
Does improvement in current accounts after exchange rate depreciation imply unambiguous expansion of output? Not
necessarily. Fig. 2 displays the response of output to a positive exchange rate shock. It is noticeable that, in Latin American
countries, current accounts generally improve but outputs are depressed simultaneously in all Latin American countries. The
current account also improves and output deteriorates in response to exchange rate depreciation in the Philippines and
Indonesia.
Diaz-Alejandro (1963) points out that an observer of devaluation could be puzzled to see that devaluations resulted in an
improvement of the trade balance which was accompanied by a decline in the level of total output. Kim and Ying (2007) have
similar ndings. This is not a bizarre result. First, the observed improvement in the current account may not be achieved
through an export boom but through a deep contraction in imports as a result of output contraction (see Frankel, 2005).
Second, the contractionary effects from exchange rate depreciation may offset the expansionary effect on trade balance,
making the overall output decrease.
Therefore, the behavior of the current account does not have a direct bearing on the behavior of output in response to an
exchange rate shock. The phenomenon of current account and output responding oppositely might pose a dilemma for
policy-makers: Exchange rate policy aiming to result in expenditure-switching that leads to a boost in the production of
tradable goods may have contractionary side effects on the overall economic activity. Thus, there will be a trade-off between
achieving high output growth and a strong balance-of-payments by using exchange rate policy. The effect is least discernible
in Switzerland and New Zealand, whose current account and output behave quite consistently.
The Latin American countries are very homogenous in that the current account generally improves while output
decreases after exchange rate depreciation, which is quite consistent with the uniformly negative cross correlations at
negative lags reported in Table 1.

Uhlig (2005) sets K = 5 in the baseline. However, considering that our data are quarterly rather than monthly as in Uhlig (2005), we choose to set K = 2.
The results of the impulse responses of other variables with sign restrictions are not reported in this paper due to the length of the paper. Results are
available upon request.
6

L. An et al. / Journal of Asian Economics 34 (2014) 2741

35

Fig. 1. Impulse response of current account to a positive exchange rate shock (K = 2). Note: Horizontal axis: quarters; vertical axis: percent. We assume that
prior and posterior distributions for (B, S) belong to the Normal-Wishart family. We simulate 500 pairs of (B, S). For each pair, we evaluate 500 unit vectors
on the 5-dimensional sphere. Thus a total of 250,000 qs and impulse vectors are evaluated.
Source: Authors calculations.

36

L. An et al. / Journal of Asian Economics 34 (2014) 2741

Fig. 1. (Continued ).

L. An et al. / Journal of Asian Economics 34 (2014) 2741

37

Fig. 2. Impulse response of real output to a positive exchange rate shock (K = 2). Note: Horizontal axis: quarters; vertical axis: percent. We assume that prior
and posterior distributions for (B, S) belong to the Normal-Wishart family. We simulate 500 pairs of (B, S). For each pair, we evaluate 500 unit vectors on
the 5-dimensional sphere. Thus a total of 250,000 qs and impulse vectors are evaluated.
Source: Authors calculations.

38

L. An et al. / Journal of Asian Economics 34 (2014) 2741

Fig. 2. (Continued ).

L. An et al. / Journal of Asian Economics 34 (2014) 2741

39

This homogeneity may illustrate the importance of the balance sheet effect. Latin American countries are well-known for
being subject to original sin, that is, not being able to borrow abroad in their domestic currencies. Eichengreen, Hausmann,
and Panizza (2002) estimate the original sin measure of one for Latin American countries, meaning that these countries issue
almost all of their securities in foreign currency. Therefore, currency devaluation will increase debt-servicing obligations
and, similar to a negative supply shock, generate stagationary effects (Gylfason & Risager, 1984). In addition, devaluation
may cause the countries to lose access to international capital markets and accelerate capital outow, which constitutes
another negative supply-side shock.
In Asian countries, output contracts signicantly in Malaysia, Indonesia, and the Philippines. In developed countries,
output contracts signicantly after exchange rate depreciation in New Zealand and Australia while it expands signicantly in
Switzerland, Denmark, the Netherlands, and Portugal. Output in Canada and Austria does not respond signicantly to an
exchange rate shock. Contractionary devaluation could happen in developed countries as well as in developing countries;
and could exist in any exchange rate regime, whether it is a exible exchange rate, or a xed exchange rate, or in a common
currency area. Therefore, contractionary devaluation may not be a function of exchange rate regimes nor types of economies.
Ahmed et al. (2002) also report that contractionary devaluation in the developed countries is as strong as in the developing
countries.
In addition, from the standpoint of the exchange rate regime, Australia and New Zealand may not enjoy the benet of a
exible exchange rate regime to a full extent, because exchange rate depreciation induced by adverse external shocks cannot
boost aggregate demand, and thus has limited effects in offsetting adverse shocks.
While impulse response functions reveal the dynamic effects of a one-time shock, variance decompositions are a
convenient measure of the importance of such shocks in the system. Table 3 reports the fraction of the uctuations of current
account and output that is attributable to exchange rate shocks at 0-, 4-, 8-, 12-quarter horizons. Exchange rate shocks play a
similar role in the three groups of countries. Exchange rate shocks account for between 3 and 33 percent of the current
account variation and 7 to 42 percent of the real output uctuations. In comparison, we nd a slightly larger role of the real
exchange rate shocks than that found in Ahmed et al. (2002), which reports about 8.111 percent in Latin American
countries, 1.612.2 percent in Asian countries, and 0.43.9 percent in developed countries.
In sum, several conclusions emerge: (1) whether output increases or not after a real devaluation has little to do with
whether the current account improves or not; (2) compared with Asia and the developed countries, Latin American countries
are quite homogenous in that current account generally improves while output decreases, which is consistent with the
uniform negative cross correlations between real exchange rate and output at the negative lags; and (3) although Latin
American countries exhibit obvious contractionary devaluation, the phenomenon is not particular to Latin American
countries. Asia and the developed countries are also subject to contractionary devaluations. However, we acknowledge that
Table 3
Variance decomposition of current account and output due to exchange rate shocks.
0

12

0.16
0.14

Brazil
CA
Y

0.03
0.10

0.08
0.14

0.11
0.16

0.12
0.17

0.15
0.18

0.16
0.19

Chile
CA
Y

0.33
0.42

0.29
0.23

0.25
0.26

0.22
0.15

0.14
0.19

0.15
0.20

0.16
0.22

Malaysia
CA
Y

0.06
0.11

0.08
0.13

0.11
0.17

0.15
0.20

0.06
0.25

0.20
0.26

0.23
0.30

0.25
0.32

Philippines
CA
Y

0.12
0.09

0.16
0.11

0.17
0.13

0.18
0.18

Australia
CA
Y

0.04
0.08

0.09
0.09

0.11
0.12

0.16
0.17

Canada
CA
Y

0.13
0.11

0.15
0.12

0.11
0.14

0.13
0.16

Denmark
CA
Y

0.10
0.09

0.14
0.13

0.15
0.15

0.16
0.16

Austria
CA
Y

0.10
0.10

0.10
0.14

0.11
0.16

0.13
0.16

Switzerland
CA
Y

0.09
0.10

0.13
0.12

0.16
0.13

0.17
0.15

Netherlands
CA
Y

0.09
0.08

0.11
0.11

0.13
0.12

0.14
0.13

New Zealand
CA
Y

0.07
0.10

0.13
0.13

0.15
0.14

0.17
0.14

Portugal
CA
Y

0.12
0.09

0.14
0.13

0.15
0.14

0.16
0.15

Mexico
CA
Y

0.09
0.10

0.13
0.12

0.14
0.13

Argentina
CA
Y

0.13
0.11

0.14
0.17

Korea
CA
Y

0.11
0.07

Indonesia
CA
Y

Source: Authors calculations.

Note: CA denotes current account, and Y denotes output.

12

40

L. An et al. / Journal of Asian Economics 34 (2014) 2741

it may not be appropriate to draw straightforward policy implications from the results in this paper. For example, nding
that a real devaluation increases output in Switzerland, Denmark, the Netherlands, and Portugal does not mean that the
exchange rates in these countries should be targeted at increasing competitiveness, because there is consensus that the real
exchange rate cannot be viably targeted on a sustained basis and such policy may be very inationary. In a similar vein,
nding that real devaluation is contractionary in Latin American and other developed countries does not provide a basis for
encouraging real exchange rate appreciation, as real exchange rate appreciation may lead to renewed balance of payment
crisis in the future.
5. Robustness check
How sensitive are the results to the different values of horizon K for the sign restrictions? In the benchmark case, K is set to
2. Here, we consider the cases for K = 1 and K = 4 for robustness check.
In the Latin American countries, the dynamics of the output response are similar to those in our benchmark specication.
In Asian countries, the results are quite robust, except that the decrease of output in Indonesia is not signicant when K = 1
and 4. In developed countries, the results are generally very robust. In sum, the results are not sensitive to the different
specication of restriction horizons. Due to space constraint, the detailed results are not reported here, but they are available
upon request.
6. Conclusion
In this paper, the effects of real exchange rate changes on real output growth for 16 countries that belong to three groups
(Latin American countries, Asian countries, and non-G3 developed countries) have been analyzed using quarterly data from
1973 to 2012. For the rst time in the contractionary devaluation literature, the empirical evidence based on a VAR model
with sign restrictions is provided. We established a model with plausible restrictions for a small subset of variables with
which to identify the exchange rate shock. The results show that whether output increases or not after a real devaluation has
little to do with whether the current account improves or not; and while contractionary devaluation is quite a homogeneous
phenomenon for the Latin American countries, the output-reduction effect of devaluation is not a function of types of
economies or of the exchange rate regimes. Contractionary devaluation may happen in developed countries as well as in
developing countries. The results are robust to several different choices of the restrictions horizon.
Based on these results, this paper attempts to offer some policy implications. Countries with contractionary devaluation,
such as Latin American countries, should not rely on exchange rate depreciation to grow the economy. Meanwhile,
overvaluation should be prevented, because real depreciation may follow periods of sustained real appreciation, and
correction of the exchange rate will have severe consequences in countries with contractionary devaluations. Does this mean
that countries with expansionary devaluation can resort to exchange rate depreciation to stimulate the economy? We
believe that it is dangerous to draw conclusions like this as well because currency depreciation tends to reduce the growth
potential of the economy, and introduce an additional uncertainty which acts as a deterrent to the investment needed to
build production capacity.
Appendix A. Data and denitions
The current account variable, CAR, is obtained as the ratio of the current account balance to the trend nominal GDP. If the
balance of payments statistics are unavailable, the current account balance is approximated by the difference between exports
and imports. The domestic consumption price index is measured by the consumer price index (CPI). The real effective exchange
rate, REER, is the trade weighted exchange rate measured by the weighted average of the bilateral exchange rates against the US
dollar. The real output, Y is measured by the index of seasonally adjusted GDP. For the money supply, MS, M1 is used for most
countries and money in the national denition is used for Switzerland, Korea, Mexico, and Malaysia.
Two exogenous variables, foreign income (Y*) and foreign interest rate (R*), are incorporated to capture the external shocks.
The US 3-month Treasury bill rate and US real GDP is used as foreign interest rate and income. The data set is quarterly and has
been collected from International Financial Statistics (IFS), Direction of Trade Statistics (DOTS), and central banks and Department
of Statistics of these countries. All variables are in logarithm except R* and CAR ratios.
The sample periods are as follows: Argentina (1973:12012:4), Austria (1973:12012:4), Australia (1973:12012:4), Brazil
(1980:12011:4), Canada (1973:12012:1), Chile (1973:12012:4), Denmark (1975:12012:1), Korea (1976:12012:1),
Malaysia (1973:12012:4), Indonesia (1980:12012:4), the Netherlands (1973:12012:4), Mexico (1985:42012:4), New
Zealand (1973:12012:4), the Philippines (1973:012011:4), Portugal (1973:12012:4), and Switzerland (1973:12012:4).
References
Ahmed, S., Gust, C. J., Kamin, S. B., & Huntley, J. (2002). Are depreciations as contractionary as devaluations? A comparison of selected emerging and industrial
economies. International Finance Discussion Papers, 737.
Bahmani-Oskooee, M., & Kandil, M. (2009). Are devaluations contractionary in MENA countries? Applied Economics, 41(2), 139150.
Blanchard, O. J., & Quah, D. (1989). The dynamic effects of aggregate demand and supply disturbances. American Economic Review, 79(4), 655673.
Canova, F., & Pina, J. (1999). Monetary policy misspecication in VAR models, Univ. Pompeu Fabra, Economics and Business Working Paper, No. 420.

L. An et al. / Journal of Asian Economics 34 (2014) 2741

41

Cooper, R. N. (1971). Currency depreciation in developing countries. In Princeton Essays in International Finance, 86. Princeton University.
Diaz-Alejandro, C. F. (1963). A note on the impact of devaluation and the redistributive effect. Journal of Political Economy, 71(August), 577580.
Edwards, S. (1986). Are devaluations contractionary? Review of Economics and Statistics, 68(3), 501508.
Edwards, S. (1989). Real exchange rates, devaluation, and adjustment: Exchange rate policy in developing countries. Cambridge, MA: MIT Press.
Eichengreen, B., Hausmann, R., & Panizza, U. (2002). Original Sin: The pain, the mystery and the road to redemption paper presented at a conference on Currency and
Maturity Matchmaking: Redeeming Debt from Original Sin Washington, DC: Inter-American Development Bank.
Farrant, K., & Peersman, G. (2006). Is the exchange rate a shock absorber or a sources of shocks? New empirical evidence. Journal of Money, Credit and Banking, 38,
939961.
Faust, J., & Leeper, E. (1997). When do long-run identifying restrictions give reliable results? Journal of Business and Economic Statistics, 15(3), 345353.
Findlay, R., & Rodriguez, C. A. (1977). Intermediated imports and macroeconomic policy under exible exchange rates. Canadian Journal of Economics, 10(2), 208
217.
Frankel, J. A. (1988). Ambiguous policy multipliers in theory and in empirical models. In R. C. Bryant (Ed.), Empirical macroeconomics for interdependent economies
(pp. 1726). Washington, DC: The Brookings Institution.
Frankel, J. A. (2005). MundellFleming Lecture: Contractionary currency crashes in developing countries. IMF Staff Papers, 52(2), 149182.
Frenkel, J. A., & Johnson, H. C. (1976). The monetary approach to the balance of payments: Essential concepts and historical origins. In J. A. Frenkel & H. C. Johnson
(Eds.), The monetary approach to the balance of payments (pp. 2145). London: Allen & Unwin/University of Toronto Press.
Fry, R., & Pagan, A. (2011). Sign restrictions in structural vector autoregressions: A critical review. Journal of Economic Literature, 49(4), 938960.
Goldstein, M., & Khan, M. (1985). Income and price effects in foreign trade. Handbook of International Economics, 2, 10411105.
Gylfason, T., & Risager, O. (1984). Does devaluation improve the current account? European Economic Review, 25, 3764.
Gylfason, T., & Schmid, M. (1983). Does devaluation cause stagation? Canadian Journal of Economics, 16(4), 641654.
Kamin, S. B., & Klau, M. (1998). Some multi-country evidence on the effects of real exchange rates on output. International Finance Discussion Papers, 611.
Kamin, S. B., & Rogers, J. H. (2000). Output and the real exchange rate in developing countries: An application to mexico. Journal of Development Economics, 61, 85
109.
Kim, Y., & Ying, Y. H. (2007). An empirical assessment of currency devaluation in East Asian Countries. Journal of International Money and Finance, 26, 265283.
Krugman, P., & Taylor, L. (1978). Contractionary effects of devaluation. Journal of International Economics, 8, 445456.
Krugman, P., Obstfeld, M., & Melitz, M. J. (2009). International economics: Theory & policy (9th ed.). Boston: Addison Wesley.
Kwan, C. H. (1994). Economic interdependence in the Asia-Pacic Region: Towards a Yen Bloc. London: Routledge.
Lizondo, S., & Montiel, P. J. (1989). Contractionary devaluation in developing countries: An analytical overview. IMF Staff Papers, 36, 182227.
Meja-Reyes, P., Osborn, D. R., & Sensier, M. (2010). Modeling real exchange rate effects on output performance in Latin America. Applied Economics, 42(19), 2491
2503.
Peersman, G. (2005). What caused the early millennium slowdown? Evidence based on vector autoregressions. Journal of Applied Econometrics, 20(2), 185207.
Raq, M. S., & Mallick, S. K. (2008). The effect of monetary policy on output in EMU3: A sign restriction approach. Journal of Macroeconomics, 30, 17561791.
Reinhart, C. M. (2000). The mirage of oating exchange rates. American Economic Review, 90(2), 6570.
Rogers, J. H., & Wang, P. (1995). Output, ination, and stabilization in a small open economy: Evidence from Mexico. Journal of Development Economics, 46(2), 271
293.
Rudebusch, G. D. (1998). Do measures of monetary policy in a VAR make sense? International Economic Review, 39(4), 907931.
Sachs, J. (1980). Wages, exible exchange rates, and macroeconomic policy. Quarterly Journal of Economics, 94(4), 731747.
Shahbaz, M., Islam, F., & Aamir, N. (2012). Is devaluation contractionary? Empirical evidence for Pakistan. Economic Change and Restructuring, 45(4), 299316.
Shi, J. (2006). Are currency appreciations contractionary in China? NBER Working Paper, 12551.
Sims, C. (1988). Bayesian skepticism on unit root econometrics. Journal of Economic Dynamics and Control, 12, 463474.
Tica, J., & Druzic, I. (2006). The HarrodBalassaSamuelson effect: A survey of empirical evidence. EFZG Working Papers Series No 06-07 from Faculty of Economics
and Business University of Zagreb.
Uhlig, H. (2005). What are the effects of monetary policy on output? Results from an agnostic identication procedure. Journal of Monetary Economics, 52(2), 381
419.
Upadhyaya, K. P., & Upadhyay, M. P. (1999). Output effects of devaluation: Evidence from Asia. Journal of Development Studies, 35(6), 89103.
Upadhyaya, K. P., Dhakal, D., & Mixon, F. G. (2000). Exchange rate adjustment and output in selected Latin American Countries. Economia Internazionale, 53(1),
107117.