Impact of currency devaluation output growth in the long run - Research Paper Example

The other group of researchers argues that continuous depreciation or devaluation is an indicator of economic weakness therefore; in the long run this relationship is no longer positive. In order to evaluate the early research work that studies the relationship between currency devaluation and output level, the literature review has been created. In this section, the research work of various researchers will be discussed and their methodologies and findings will be also reported to gain a significant insight to the topic under investigation.

Various economic models such as Keynesian model argue that devaluation of currency has an expansionary impact on domestic output (Lai & Chang, 1989). According to the orthodox view devaluation has a positive impact and has a very significant role in the balance of payments stabilization whereas, the New Structuralist School argues that currency devaluation has a contractionary impact (Agénor, 1999). The depreciation of currency improved the demand of exports and shifts the aggregate demand curve to the right, thereby, increasing the real GDP (Lee, 2002).

Christopoulos (2004) studied the impact of currency devaluation on output expansion in Asian countries for the period 1968-1999 by using panel data unit root tests and cointegration tests and found that currency devaluation affects output growth in the long run. Huang, Hsu and Kang (2010) used an empirical model and econometric methodology to study the impact of current devaluation on output in Asian countries and their empirical results showed a positive relationship between currency depreciation and output growth in Asian countries.

On the other hand various researchers found the relationship between currency devaluation and output level negative, neutral or positive in the short term. Krugman and Taylor (2002) studied the contractionary impact of currency devaluation