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Exchange Rate and Output in the Aftermath of the Great Depression and During the Transition Period in Central Europe

Author

Listed:
  • Velimir Šonje
Abstract
The author compares the influence of the exchange rate on economic activity during two distinct historical episodes: the aftermath of the Great Depression and the second stage of transition in Central Europe (1994–1998). The main hypothesis is that benefits from devaluation may actually be derived from the coordination of international economic policy. This is an important distinction because benefits from devaluation lead to the policy prescription “if all devalue, everybody is better off,” while benefits from coordination lead to a much more carefully implemented exchange rate policy. The author finds that large devaluations/depreciations in transition countries always seem to be detrimental to growth, while small fluctuations in the exchange rate seem to support various output scenarios, depending on the initial conditions and/or the speed of market reforms (where the latter depend on the former) and historical circumstances (such as membership in the FSU). Where seeming benefits from devaluation did appear, they may have occurred simply because some small and open economies had successfully coordinated their monetary policies with their main trading and financial partners. Many of the “benefits” from devaluation in the aftermath of the Great Depression can be attributed to the successful coordination between the Scandinavian countries and their main trading partner – Great Britain. From a comparison of two very distinct historical episodes, the author concludes that devaluation is not a good strategy for an individual country and the approach “if all devalue, everyone is better off” cannot automatically be established as a policy prescription. In many cases, the costs of devaluation may exceed the benefits. The results in this paper point beyond the usual economists’ credo that no single currency regime is right for all countries at all times. The results indicate that the international propagation mechanisms and the issues of international economic policy coordination are crucial in determining the impact of devaluation.

Suggested Citation

  • Velimir Šonje, 2000. "Exchange Rate and Output in the Aftermath of the Great Depression and During the Transition Period in Central Europe," Working Papers 4, The Croatian National Bank, Croatia.
    • Handle: RePEc:hnb:wpaper:4
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    References listed on IDEAS

    as
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    Cited by:

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    2. Zvonimir Savic, 2015. "EU fondovi i Junckerov program kao poticajni alati investicija i ukupnog gospodarskog razvoja," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 53-74.
    3. Mirjana cizmovic & Jelena Jankovic & Milenko Popovic, 2015. "Growth Anatomy of Croatian Economy," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 159-216.
    4. repec:eff:ekoeco:v:22:y:2015:i:1:p:115-137 is not listed on IDEAS
    5. repec:eff:ekoeco:v:11:y:2005:i:3:p:392-424 is not listed on IDEAS
    6. Guste Santini, 2015. "Porez na dodanu vrijednost - porez buducnostic," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 23-52.
    7. Neven Vidakovic & Dubravko Radoševic, 2015. "Kretanje kapitala u Hrvatskoj 2009. - 2015. - Opcije za izbor novog ekonomskog modela Hrvatske -," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 115-134.
    8. Nikša Grgurevic, 2015. "Uzroci i posljedice reprodukovanja institucionalnog vakuuma u državama Jugoistocne Evrope," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 231-243.
    9. Mimo Draškovic & Lakic Slobodan & Veselin Draškovic, 2015. "Kljucni problemi Crne Gore na putu pridruživanja EU," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 217-230.
    10. Dragoljub Stojanov, 2015. "The Scope, Challenges and Perspective of Croatian Development Policy in the Context of the EU Destiny," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 75-88.
    11. Sofija Adžic, 2015. "Zaokret iz recesije ka ekonomskom razvoju sa novim tokom reindustrijalizacije u regionu," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 135-158.
    12. Damir Novotny, 2015. "Fiskalna politika i kriza hrvatskog gospodarstva - u potrazi za rješenjima-," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 1-22.

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    More about this item

    Keywords

    Exchange Rate; Output; International Propagation of Shocks; Great Depression; Transition;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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