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Cambridge Journal of Economics Advance Access originally published online on October 4, 2007
Cambridge Journal of Economics 2008 32(1):83-109; doi:10.1093/cje/bem021
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© The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

The fallacy of composition and contractionary devaluations: output effects of real exchange rate shocks in semi-industrialised countries

Robert A. Blecker and Arslan Razmi*

* American University, Washington, DC, USA, and University of Massachusetts, Amherst, MA, USA, respectively

Address for correspondence: Robert A. Blecker, Department of Economics, American University, 4400 Massachusetts Avenue, N.W., Washington, DC 20016-8029, USA; email: blecker{at}american.edu

This paper studies whether intra-developing country price competition has significant effects on the short-run growth of output in developing countries that are specialised in manufactured exports. Regression estimates using the generalised method of moments applied to annual panel data for 17 semi-industrialised countries in 1983–2004 show that these countries exhibit a ‘fallacy of composition’, in the sense that a real depreciation relative to competing developing country exporters increases the home country's growth rate at the expense of its competitors' growth. The results also suggest that real depreciations for these developing countries relative to the industrialised countries are contractionary.

Key Words: Real exchange rates • Fallacy of composition • Manufactured exports • Contractionary devaluations • Semi-industrialised countries

JEL classifications: O11, F43, O14, F32

Manuscript received November 21, 2005; final version received February 19, 2007.


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