Christensen on devaluation
Lars Christensen has a good post on the workings of currency devaluation. The point is that currency devaluation works through lifting M and V more than through softening the blow to exports, or improving competitiveness. This would suggest that there is unlimited scope for devaluation in a crisis, so long as NGDP is forecast to be under trend. Which in turn implies that Poland is the great monetary hero of 2008/2009, because they temporarily annihilated their currency to keep NGDP going. [I say unlimited scope because "beggar thy neighbor" export boosting should quickly run into diminishing returns, especially in a worldwide crisis. ]
It would be interesting for someone to compare the composition of GDP between Sweden, who devalued meaningfully in early 2009, and Denmark/Finland who were chained to the Euro. If Sweden’s stronger recovery was driven by domestic spending—as memory serves— not exports, this would help us to better understand the transmission mechanism at work there. It would also be interesting to dig into Poland’s numbers, though I don’t know which land is a good control…Lithuania? Each country in central Europe is pretty economically and monetarily unique. Perhaps just graphing net exports along with domestic spending would do it.
Maybe tonight.
Thanks for the positive comments on my blog post. Concerning Sweden, Finland, Denmark and Lithuania the story is pretty clear for three of four countries. Both Danish and Lithuanian exports have done relatively well despite lose of competitiveness due to pegged exchange rates, but the real drag on growth have been weak domestic demand in both countries. Contrary to this Swedish domestic demand has been very strong. This indicate that for these three Nordic countries my thesis hold (has is the case for the other Baltic countries and Iceland). Finland however stand out as an outline – with Finnish domestic demand having grown quite strong through the crisis – that however seems to be changing as we are speaking.
Då finns det inget behov för mig att skapa diagramer…Tack för informationen Lars och din utmärkt blog!