Are Devaluations Contractionary? Evidence from Panel Cointegration

Abstract

Earlier studies that investigated the relation between exchange rate and domestic output employed panel data. In this paper we improve upon the traditional approaches of the existing econometric literature on contractionary devaluation or depreciation by applying panel unit root and panel cointegration techniques to annual data from 42 countries (18 OECD and 24 non-OECD). After confirming the existence of unit roots in all variables of the model as well as cointegration among all variables, results from different specifications of the model revealed that in the long-run, devaluations are contractionary in non-OECD countries regardless of model specification. However, for OECD countries the results were sensitive to model specification.