A cheaper currency does not always boost economic growth

By The Economist online

IN SEPTEMBER 2010 Brazil’s then-finance minister, Guido Mantega, gave warning that an “international currency war” had broken out. His beef was that in places where it was difficult to drum up domestic spending, the authorities had instead sought to weaken their currencies to make their exports cheaper and imports dearer. The dollar had recently fallen, for instance, because the Federal Reserve was expected to begin a second round of quantitative easing. The losers in this battle were those emerging markets, like Brazil, whose currencies had soared. Its currency, the real, was then trading at around 1.7 to the dollar.

These days a dollar buys 3.4 reais, but no one in Brazil or in other emerging markets with devalued currencies is declaring a belated victory. A cheap currency has not proved to be much of a boon. Indeed new research from Jonathan Kearns and Nikhil Patel, of the Bank for International Settlements (BIS), a forum for central banks, finds that at times a rising currency can be a stimulant and a falling currency a depressant. They looked at a sample of 44 economies, half of them emerging markets, to gauge the effect of changes in the exchange rate on exports and imports (the trade channel) and also on the price and availability of credit (the financial channel).

They found a negative relationship between changes in GDP and currency shifts…

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Read more here: A cheaper currency does not always boost economic growth

Category: Business and finance, Approved, Finance and economics, FINANCE

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