Devaluation and Output Growth in Palestine: Evidence from a CGE model

Abstract

Whether exchange rate devaluation supports economic growth or not is an open question empirically. This paper analyzes the impacts of the devaluation on the Palestinian economy using a computable general equilibrium model. We investigate the effect of a 15% devaluation of the exchange rate on output growth of Palestine. By using latest data (a 2012 social accounting matrix for Palestine) and CGE modeling, this paper finds that devaluation is contractionary in Palestine. A 15% devaluation of the exchange rate results on lower real gross domestic product, the simulation results show that GDP will decrease by 1.99 %. Import and export will decline by 20.61% and 52.67% respectably. Also, a 15 percent devaluation will reduce the level of private consumption by 6.31 % and inflation (CPI) will increase by 4.7 from the base line.