The Asymmetric Effects of Exchange Rate Fluctuations

The paper examines the asymmetric effects of exchange rate fluctuations on real output and price in developing countries. The theoretical model decomposes movements in the exchange rate into anticipated and unanticipated components. Unanticipated currency fluctuations determine aggregate demand through exports, imports, and the demand for domestic currency, and determine aggregate supply through the cost of imported intermediate goods. The evidence indicates that the supply channel leads to output contraction and price inflation in the face of unanticipated currency depreciation. In contrast, the reduction in net exports determines output contraction without reducing price inflation in the face of unanticipated currency appreciation.Exchange rates;Developing countries;Economic models;exchange rate, inflation, price inflation, real output, exchange rate shocks, currency depreciation, aggregate demand, currency appreciation, exchange rate fluctuations, money supply, real effective exchange rate, effective exchange rate, foreign currency, price level, exchange rate variability, price deflation, real exchange rate, rational expectations, effective exchange rates, real interest rate, real money, real value, relative prices, exchange rate depreciation, nominal exchange rate, exchange rate shock, nominal interest rate, exchange rate policy, exchange rate movements, exchange rate appreciation, currency devaluation, real money supply, terms of trade, real national income, currency units