Contractionary Devaluation Risk: Evidence from the Free Silver Movement, 1878–1900

I identify significant effects of devaluation risk on interest rates and output using US silver coinage policy news between 1878 and 1900 as clean shocks to exchange rate expectations. The Free Silver movement heightened fears the United States would abandon the gold standard and depreciate the dollar. Because Congress, rather than a central bank, set silver coinage policy, silver policy news was likely uncorrelated with economic shocks. Corporate bonds exposed to dollar devaluation returned an additional 1 percent relative to safer bonds when silver risk decreased. Additionally, increased silver coinage risk is associated with an economically significant fall in industrial production.

Effects of the Exchange Rate on Output and Price Level: Evidence from the Pakistani Economy

The question of whether devaluation of the currency affects output positively or negatively has received considerable attention both from academic and empirical researchers. A number of empirical studies have supported the contractionary devaluation hypothesis using pooled time series data from a large number of heterogeneous countries. Since the effects of devaluation on output and the price level may not be uniform across all developing countries, the empirical results can not be generalized for all countries. In addition, almost none of the empirical studies used to test the contractionary devaluation hypothesis separate the effects of devaluation from import prices. Thus, a country specific study is needed that separate the effects of devaluation from the import price effects. This paper uses a VEC model to analyze the effects of the exchange rate on output and the price level in Pakistan for the period 1975-2005. Our analysis shows that devaluation has a positive effect on output but a negative effect on the price level. Thus, the evidence presented in this paper does not support the contractionary devaluation hypothesis for the Pakistani economy.

Does Stability Preclude Contractionary Devaluation?

In this paper we attempt to assess the relevance of correspondence principle in determining the possible effects of currency devaluation on balance of payments and employment. We developed a model in line with Buffie (1986) who derived a very strong result that if the model is locally stable and if labour and imported inputs are gross substitutes then devaluation will certainly improve labour employment and balance of payments at the same time. For the general production function the Buffie model predicts that devaluation cannot contract both employment and balance of payments at the same time since either of them is incompatible with the stability of the model. Buffie results by and large depend upon stability conditions of the model and what we have demonstrated that stability analysis of the model unfortunately is not free of error. In the corrected model we observe that the results derived by Buffie do not hold in general.