Diminishing Returns to Real Depreciation in Achieving Macroeconomic Goals

Exchange-rate devaluation is a central component of stabilization programs proposed for debt-burdened developing countries. It has also become a key component of trade liberalization and export promotion strategies undertaken by these countries to enhance their products' "competitiveness" on world markets. A number of countries, most notably Turkey, have taken this policy to extreme lengths. In this paper, the author argues that the effectiveness of this policy will be diminished through consistent application. The borrowing constraint is then eased, but is replaced by insufficient domestic demand for tradables. Total domestic expenditure, and thus domestically-generated economic growth, is slowed.