Philadelphia paper models export dynamics after large devaluations

A Federal Reserve Bank of Philadelphia working paper, published yesterday, creates a model of export dynamics and uses it to analyse the "sluggish" response of exports to large devaluations in emerging market currencies.

The paper, Export Dynamics in Large Devaluations by George Alessandria, Sangeeta Pratap and Vivian Yue, produces five main findings.

The sluggishness, the authors say, results in "more gradual net export reversals, sharper contractions and recoveries in output, and endogenous stagnation in labour productivity".

They suggest their analysis would be a useful addition to the debate surrounding monetary policy in the eurozone, where periphery countries such as Greece are unable to devalue their currency to boost competitiveness. Some observers, the authors say, point to this as a contributing factor to their ongoing stagnation.

"The common view is that a devaluation would boost GDP by leading to substantial expenditure-switching at home and abroad," the paper says.

"Here we find that the physical barriers to trade mitigate some of the stimulatory effects of devaluations initially while boosting growth in the long run."