The impact of exchange rate adjustment on output: Jamaica 1960–90

Abstract

Recent articles have argued that devaluations can have a short–term contractionary impact followed by an expansionary phase that may or may not result in net expansion in the long term. This paper extends recent work on this issue by developing a specification that obviates the problems of spurious and inconsistent parameter estimation that may result in the absence of stationarity and cointegrating relationships. The findings suggest that exchange devaluations have had a neutral impact on Jamaican output. It also examines the implicit assumption that within the real exchange rate relationship the nominal exchange rate and the relative price effects are of equal weight, and finds this not to be the case.