Working Paper: CEPR ID: DP970
Authors: Andrea Boltho
Abstract: Standard theory predicts that exchange rate changes have merely temporary real effects. Yet, if the higher profits that a devaluation ensures are used to improve non-price competitiveness, longer-run effects are possible. The paper looks at the experience of Germany, Spain, France and Italy which, in the 1950s and 1960s, either benefited from low parities or devalued their currencies. Favourable exchange rates probably contributed to these countries' rapid growth, but so did trade liberalization. In today's Europe the scope for further trade liberalization is limited while the uncertainties introduced by floating exchange rates make successful devaluations less likely.
Keywords: exchange rates; competitiveness; Bretton Woods; trade liberalization
JEL Codes: F43; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Exchange rate devaluation (F31) | higher profits (D33) |
| higher profits (D33) | increased investment in non-price competitiveness (F23) |
| Exchange rate devaluation (F31) | increased investment in non-price competitiveness (F23) |
| Trade liberalization (F13) | increased competitiveness (L19) |
| Exchange rate changes (F31) | competitive advantage (L21) |
| Exchange rate changes (F31) | strategic shifts in production and investment (F20) |
| Low exchange rates (F31) | rapid output growth (O49) |
| Low exchange rates (F31) | increased investment ratios (G31) |
| Low exchange rates (F31) | structural transformations in export compositions (F14) |