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On floating exchange rates, currency depreciation and effective demand

Author

Listed:
  • Julio Lopez

    (Universidad Nacional Aut6noma de México, México D.F. (Mexico))

  • Ignocio Perrotini Perrotini

    (Universidad Nacional Aut6noma de México, México D.F. (Mexico))

Abstract

This paper discusses the relative advantages of floating exchange rates vis-a-vis a pegged exchange rate regime, with special emphasis on the implications foreffective demand. More particularly, it explores whether a currency depreciationhas a beneficial effect on aggregate demand and hence on employment. The authors argue that this issue is central to the whole principle of effective demand, and that the idea of a currency depreciation being able to stabilize effective demand is to a large extent analogous to the claim that (downward) flexibility of nominal (and real) wages can ensure full employment. Accordingly, the relationship between downward wage flexibility and effective demand is analysed and the hypothesis that exchangerate flexibility can have stabilizing properties when exogenous shocks of various kinds are taken into account is critically assessed both theoretically and empirically. The paper concludes that while exchange rate flexibility can be a useful instruments, it may have some side effects that should be taken into account.

Suggested Citation

  • Julio Lopez & Ignocio Perrotini Perrotini, 2006. "On floating exchange rates, currency depreciation and effective demand," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 221-242.
    • Handle: RePEc:psl:bnlaqr:2006:31
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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9868/9750
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    References listed on IDEAS

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    Cited by:

    1. Köhler, Karsten, 2016. "Currency devaluations, aggregate demand, and debt dynamics in an economy with foreign currency liabilities," IPE Working Papers 78/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    2. Francisco A. Martínez-Hernández, 2016. "Real Exchange Rate, Effective Demand, and Economic Growth: Theory and Empirical Evidence for Developed and Developing Countries, 1960-2010," Working Papers 1609, New School for Social Research, Department of Economics.
    3. Cecilia Bermúdez & Carlos Dabús, 2018. "Going under to stay on top: How much real exchange rate undervaluation is needed to boost growth in developing countries," Estudios de Economia, University of Chile, Department of Economics, vol. 45(1 Year 20), pages 5-28, June.
    4. Mario Sarcinelli, 2006. "On floating exchange rates, currency depreciation and effective demand: a comment," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(239), pages 389-395.
    5. Mario Sarcinelli, 2006. "On floating exchange rates, currency depreciation and effective demand: a comment," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(239), pages 389-395.

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    More about this item

    Keywords

    Currency; Exchange Rate;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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