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Depreciate to save the economy? An empirical evidence worldwide

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  • Chen Ku‐Hsieh

Abstract

Can depreciation save the economy? This paper conducts an empirical examination with balanced panel data for 133 economies from 1980 to 2014. In the study, the impact of depreciation is dichotomized into common effect and individual effect. The results show that, first of all, the common effect is negative in the current period, and turns to be positive in the lag period, while the magnitude of the former is higher. Secondly, it is also revealed that in terms of individual effect, the negative impact of the common effect will be intensified by the degree of openness, but be mitigated by the scale, floatability, and development level of economies. Among them, scale has a decisive influence. Third, when putting the two tiers of effects together, the aggregate results are generally not strong; moreover, only a few economies can benefit from depreciation. The exceptions are the US and China, which can obtain approximately 0.58% benefits from a 1% depreciation. Fourth, insufficient evidence was found to show a contribution of exchange rate change to total factor productivity. Fifth, there is a two‐way causal relationship between exchange rate and output; however, the causality between exchange rate and productivity is not obvious.

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  • Chen Ku‐Hsieh, 2021. "Depreciate to save the economy? An empirical evidence worldwide," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1563-1585, January.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:1:p:1563-1585
    DOI: 10.1002/ijfe.1864
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