Great read, so basically devaluing a currency boosts non-tradable sectors (like tourism, real estate)and brings in hot money. The conventional theory that devaluation leads to export led growth isn't really that accurate since the strength of devaluation boosting exports isn't that strong. So the idea that devaluation brings growth is right, but people say it for the wrong reasons.
This makes sense because when a country devalues a currency, then that central bank usually tries to increase interest rates to stem inflation. A trader could make easy money by doing carry trade. Borrow in a relatively low interest currency (yen, swiss franc,euro) and buy in a high yield currency that just did a devaluation. We see this all the time with Egypt or Brazil!
Is it possible to distinguish trade that is “really” priced in dollars from trade that uses dollars as a medium of exchange? That is, a non-US company could quote its prices in USD and keep them more or less fixed in USD terms regardless of the local currency’s fluctuations. Or, it could internally price its goods in florins, and then send over invoices in USD based on whatever the florin-dollar rate was at time of purchase. This would presumably save the buyer some hassle while still insulating the seller from exchange rate risk.
What about the credit worthiness channel? If unexpected inflation occurs, fixed rate debtors are more able to repay their old loans, so they are thusly more credit worthy to get new loans (since their old debt weighs them down less than before in real terms).
According to perplexity, 2/3 of the world population live under some kind of capital controls. Most developed countries have capital mobility but most developing countries don't. You might want to adjust your models unless you think capital controls are very easy to evade (which they kind of are).
The above graphs are estimated on a sample of largely developing countries, so likely the controls are incomplete and (empirically) capital appears to be flowing in. The point about capital controls in general is well taken, though.
Great read, so basically devaluing a currency boosts non-tradable sectors (like tourism, real estate)and brings in hot money. The conventional theory that devaluation leads to export led growth isn't really that accurate since the strength of devaluation boosting exports isn't that strong. So the idea that devaluation brings growth is right, but people say it for the wrong reasons.
This makes sense because when a country devalues a currency, then that central bank usually tries to increase interest rates to stem inflation. A trader could make easy money by doing carry trade. Borrow in a relatively low interest currency (yen, swiss franc,euro) and buy in a high yield currency that just did a devaluation. We see this all the time with Egypt or Brazil!
Yep, a really reduced version of this is that depreciations make possible the carry trade, which lures in capital, which in turn fuels domestic booms.
Is it possible to distinguish trade that is “really” priced in dollars from trade that uses dollars as a medium of exchange? That is, a non-US company could quote its prices in USD and keep them more or less fixed in USD terms regardless of the local currency’s fluctuations. Or, it could internally price its goods in florins, and then send over invoices in USD based on whatever the florin-dollar rate was at time of purchase. This would presumably save the buyer some hassle while still insulating the seller from exchange rate risk.
What about the credit worthiness channel? If unexpected inflation occurs, fixed rate debtors are more able to repay their old loans, so they are thusly more credit worthy to get new loans (since their old debt weighs them down less than before in real terms).
Good read
How does the presence or absence of capital controls impact your theory?
I think it implicitly assumes capital mobility.
According to perplexity, 2/3 of the world population live under some kind of capital controls. Most developed countries have capital mobility but most developing countries don't. You might want to adjust your models unless you think capital controls are very easy to evade (which they kind of are).
The above graphs are estimated on a sample of largely developing countries, so likely the controls are incomplete and (empirically) capital appears to be flowing in. The point about capital controls in general is well taken, though.