The Macroeconomic Consequences of Exchange Rate Depreciations

Masao Fukui, Emi Nakamura, and Jón Steinsson

Regime-induced exchange rate depreciations are strongly expansionary. Net exports fall (ruling out an export led boom) and nominal interest rates rise (ruling out a monetary expansion). To explain these findings, we build a financially driven exchange rate model (FDX model) with a strong foreign credit channel. Our model is also consistent with exchange rate disconnect and the Mussa facts.