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A New Approach to Currency Depreciation
Author(s) -
Batra Ravi,
Beladi Hamid
Publication year - 2008
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2007.00374.x
Subject(s) - economics , disequilibrium , depreciation (economics) , currency , monetary economics , balance of payments , balance of trade , exchange rate , price level , international economics , microeconomics , medicine , profit (economics) , financial capital , capital formation , ophthalmology
Currency depreciation has been studied conventionally in terms of three hypotheses—the elasticities approach, the monetary approach and the absorption approach. In this paper we offer another hypothesis called the price approach, wherein the balance of payment disequilibrium results from an inappropriate price level. Specifically, a country has a trade surplus if the equilibrium price level is below that compatible with balanced trade; by contrast, it has a trade deficit if the price level is above that compatible with balanced trade. We illustrate the price approach with the experience of currency devaluations that have occurred in emerging markets since 1997.