Currencies: Exchange rate significance for growth – Goldman Sachs

Research Team at Goldman Sachs, notes that the foreign exchange markets have shown some outsized moves n in recent years, and many macroeconomic models suggest that these moves should have large effects on growth.

Key Quotes

“But the recent experience casts some doubt on this prediction, as changes in net exports after large exchange rate moves have often fallen short of expectations.

We therefore take another look at the effects of exchange rate changes on exports, imports, and GDP, and how they have evolved over time. Using a panel of 23 advanced economies since 1980, we first estimate the effects of exchange rate movements on export and import prices, and then the effects of these price changes on export and import volumes.

Historically, exchange rate movements have had large effects on net trade. We find that a 10% real depreciation boosted net exports by an average of 1.3% of GDP until the late 1990s. But the effect has averaged only 0.6% of GDP since then, all because of a smaller impact of export and import prices on trade volumes. The effects are bigger in Europe and Canada than in the US and Japan.

Our results suggest that the net export effect from exchange rate movements may be a little smaller than generally believed. Potential implications are that 1) the pound sterling depreciation may provide only a partial growth offset to the Brexit shock, 2) Japan may continue to “muddle through” despite the sharp yen appreciation this year, and 3) renewed dollar appreciation should be a manageable drag on US growth.”