Posted by: Dirk | September 30, 2015

IMF finds that depreciation leads to increase in exports

The IMF has published a chapter on exchange rate movements and the current account in its recent World Economic Outlook. Here is the summary:

Recent exchange rate movements have been unusually large, triggering a debate regarding their likely effects on trade. Historical experience in advanced and emerging market and developing economies suggests that exchange rate movements typically have sizable effects on export and import volumes. A 10 percent real effective depreciation in an economy’s currency is associated with a rise in real net exports of, on average, 1.5 percent of GDP, with substantial cross-country variation around this average. Although these effects fully materialize over a number of years, much of the adjustment occurs in the first year.

Economists often say that because of globalization (supply chains, lower transport costs, etc.) the expansionary effect of a depreciation or devaluation of the currency do not apply anymore. Countries that would leave the euro zone, for example, could not hope to see improvements in their current account. However that may be, the data says that net exports increase by 1.5 percent of GDP on average. I highlight the fact that the rise in next exports is not 1.5 percent, which would not be much, but 1.5 percent of GDP, which is significant.

The recent depreciation of the euro that was engineered by the ECB (QE) was of that magnitude (about 10% against the USD), so even though euro zone GDP growth is meagre – the forecast by the EU from spring said 1.5% – it would be exactly zero if the euro would not have depreciated if we assume that the depreciation of the euro led to average consequences. This leaves us with a euro zone that is not functional and only grows because of its beggar-thy-neighbor policy which probably led to a crowding out of domestic production elsewhere. After all, the world economy’s GDP growth rate is falling.



  1. Interesting evidence re the effects of quantitative easing on the euro. Growth in the eurozone clearly remains weak despite the depreciation and if that is all that is stimulating the economy, then an expansion of domestic demand in the current account surplus countries is needed. Germany already has quite low unemployment so would have to be careful with any fiscal expansion. Thanks for this post.

  2. Is that GDP growth in US dollars or the devalued currency? If later was there truly any growth, just the affect of the devaluation, (i.e. same production just more currency to equal it)

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