Graduate Program

Economics

Degree Name

Master of Arts (MA)

Semester of Degree Completion

2008

Thesis Director

Mukti Upadhyay

Thesis Committee Member

Hui Li

Thesis Committee Member

Minh Dao

Abstract

Many economists have analyzed data from developed and developing countries to determine the effects of devaluation on output. The evidence so far has been mixed, expansionary in some countries and contractionary in others, growth retarding in the short run and neutral in the long, and so on. This paper examines the evidence on seven developing countries from Asia during the period 1972-2006 to see if data support the contractionary devaluation hypothesis. These countries are: India, Indonesia, S. Korea, Malaysia, the Philippines, Sri Lanka, and Thailand.

The model in this study identifies the effects of the real exchange rate, a key variable in this research, after controlling for the role of several other factors including monetary and fiscal policies, and external sector variables such as the terms of trade, foreign direct investment, and current account balance as determinants of economic growth. Different versions of the OLS multiple regression model show that an exchange depreciation in real terms leads to a decline in the growth of output for India, Malaysia, South Korea and Thailand. To check the robustness of these results, pooled cross-country time-series models are also studied. These panel models show drastically different results for the effects of exchange depreciation. The annual panel shows that real devaluation has a negative impact on growth whereas the three-year average data with fixed effects fails to support this conclusion.

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