The effect of currency crisis on GDP dynamics: PGLS approach

Document Type : Research Paper


Tabriz University


It is important for economic policy makers to study and predict the sustainability of currency crisis effect on macroeconomic variables, especially GDP. In this regard, the main purpose of this paper is to examine the effect of currency crisis on GDP dynamics during 1970-2016.  In this regard, the empirical model has been estimated using the theoretical basis of the research and GPS approach. According to the results, the negative effect of the currency crisis on GDP is confirmed in short run.   Foreign capital inflow and short-term foreign debt are among the factors exacerbating the effect of currency crisis on GDP growth in short run.  The rate of export growth and the changes in terms of trade are moderating effect of currency crisis on -GDP.  Increasing the supply of national currency as well as increasing government spending and budget deficits are exacerbating effect of crisis.


Main Subjects

  1. Abbasian, E., Moradpour Auladi, M., Mehregan, N. (2012). The Effects of Real Exchange Rate Uncertainty on Economic Growth in Iran. Journal of Economic Research (Tahghighat- E- Eghtesadi), 47(1), 153-169. doi: 10.22059/jte.2012.24677 (In Persian).
  2. Abiad, Abdul G., et al. "What’s the damage? Medium-term output dynamics after banking crises." IMF working papers (2009): 1-37.
  3. Basistha, Arabinda, and Sheida Teimouri. (2015). Currency crises and output dynamics. Open Economies Review 26.1: 139-153.
  4. Calvo, Guillermo, A., (1998), .Capital Flows and Capital Market Crises: The Simple Economics of Sudden Stops., Journal of Applied Economics, November, Vol. 1, 35-54.
  5. 5.         Calvo, Guillermo, A., and Carmen M. Reinhart, 1999, .When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options, Mimeo, University of Maryland.
  6. Chinn, Menzie D. and Hiro Ito. 2006.”What Matters for Financial Development? Capital Controls, Institutions, and Interactions,” Journal of Development Economics, Volume 81, Issue 1, Pages 163-192 (October).
  7. Edwards, S. (1989). Real Exchange Rates, Devaluation, and Adjustment. MIT Press, Cambridge, Massachusetts.
  8. Frankel, J. A., and Rose, A. K. (1997). Currency crashes in emerging markets: An empirical treatment. Journal of International Economics, 72 (2), 351-366.
  9. Furceri, D., & Zdzienicka, A. (2012). Banking crises and short and medium term output losses in emerging and developing countries: The role of structural and policy variables. World Development40(12), 2369-2378.
  10. Guellec, Dominique, and Bruno van Pottelsberghe de la Potterie, (2002), “R&D and Productivity Growth: Panel Data Analysis for 16 OECD Countries, OECD Economic Studies, Vol. 2001, No. 2, pp. 128–63.
  11. Gupta, P., Mishra, D. and Sahay, R. (2007). Behavior of output during currency crises. Journal of International Economics, 72 (2), 428-450.
  12. Hong, Kiseok, and Aaron Tornell. "Recovery from a currency crisis: some stylized facts." Journal of Development Economics 76.1 (2005): 71-96.
  13. Hutchison, M. M., and Noy, Ilan (2002). Output Costs of Currency Crisis and Balance of Payment Crises in Emerging Markets. Comparative Economic Studies, 44, 27.
  14. Jovanovic, Branimir. (2012). How policy actions affect short-term post-crisis recovery?.
  15. Kiyotaki, Nobuhiro, and John Moore, (1997), “Credit Cycles,” Journal of Political Economy, Vol. 105 (April), pp. 211–48.
  16. Krugman, P. (1979). A Model of Balance-of-Payments Crises. Journal of Money, Credit and Banking, 11 (3), 311-325.
  17. Laeven, L. A., and Valencia, F. (2012). Systematic Banking Crises: A New Database. IMF Working Paper No. 08/224.
  18. Laeven, L. A., and Valencia, F. V. (2010). Resolution of Banking Crises: The Good, the Bad, and the Ugly. IMF Working Paper No.10/146.
  19. Mehrara, M., Sarkhosh, A. (2011). Nonlinear Effects of Macroeconomic Variables on Economic Activities with Emphasis on the Exchange Rate (The Case of Iran). Journal of Economic Research (Tahghighat- E- Eghtesadi), 45(4), 201-228 (In Persian).
  20. Mishkin, Frederic S., (1999), .Global Financial Instability: Framework, Events, Issues., Journal of Economic Perspective, Vol. 13, Number 4, pp. 3-20.
  21. Milesi-Ferretti, Gian Maria, and Assaf Razin, 1998, “Current Account Reversals and Currency Crises: Empirical Regularities,” NBER Working Paper No. 6620 (Cambridge, Massachusetts: National Bureau of Economic Research).
  22. Morley, S (1992). On the effect of devaluation during stabilization programs in LDC’s. The Review of Economics and Statistics, Vol. 74, Issue 1, pp.21-27. February.
  23. Park, Yung Chul, and Jong-Wha Lee. (2003). Recovery and sustainability in East Asia. Managing currency crises in emerging markets. University of Chicago Press, 275-320.
  24. Pilbeam, Keith (2013). “International Finance”. 4th ed. (pp. 454-480). PALGRAVE MACMILLAN.
  25. Pontines, V and R Siregar (2008): Fundamental pitfalls of exchange rate market pressurebased approaches to identification of currency crises, International Review of Economics and Finance, Vol. 17, pp. 345-365.
  26. Smets, Frank, Kai Christoffel, Gunter Coenen, Roberto Motto and Massimo Rostagno (2010), DSGE models and their use at the ECB, Journal of the Spanish Economic Association, Volume 1, Numbers 1-2, Pages 51-65
  27. Obstfeld, M. (1994). The Logic of Currency Crises. Cahiers Economiques et Monetaires, 43, 189 – 213.

28.Rodrik, Dani and Andres Velasco, 2000, .Short-Term Capital Flows., NBER Working Paper, W7364.

  1. Tavakoli , A., Sayyah, M. (2010). The Impact of Exchange Rate Fluctuations on Economic Activities in Iran. Journalof Monetary and Banking Research, Issue 4 Pages 59-78 (In Persian).