Over the past decade, many countries like Brazil and Argentina have devalued their currency to increase growth. However, researchers say this strategy only works for labour-intensive firms in the short term and could have many long-term consequences.
When a country devalues its currency, its goods are cheaper on the world market, which boosts exports and profits. However, all imports become more expensive, making importing capital more expensive.
In the long run, however, these profits may be illusory because of the higher capital costs.
Ultimately, a key factor that determines whether the firms benefit from devaluation is whether the cost advantage from cheaper labour outweighs the disadvantage from expensive capital.
Source: Carlos Lozada, Impact of Devaluations on Commodity Firms, NBER Digest, December 2002. Based on: Kristin Forbes, Cheap Labour Meets Costly Capital: The Impact of Devaluations on Commodity Firms, National Bureau of Economic Research, Working Paper No. 9053, July 2002.
For Digest Article: http://www.nber.org/digest/dec02/w9053.html
For abstract: http://www.nber.org/papers/W9053
For more on International Currency Issues: http://www.ncpa.org/iss/int
FMF Policy Bulletin/4 March 2003
