Exchange rate adjustment and output in South-East Asia

Abstract

This paper studies the effect of currency devaluation on aggregate output level in South- East Asian countries using panel data from Thailand, Malaysia, Indonesia and the Philippines for a period from 1980 to 2010. An empirical model that includes monetary, fiscal and exchange rate variables is developed. Two versions of the model, one with real exchange rate and another with nominal exchange rate and foreign-to-domestic price ratio are estimated. An error correction model is developed and the time series properties of the panel data are diagnosed before estimating the model. The estimated results suggest that currency devaluations are contractionary in the short run and the intermediate run and this contractionary effect comes from the change in nominal exchange rate and not from the change in foreign-to-domestic price ratio. © by author(s).