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Has devaluation in 2009 improved Fiji's trade balance?

Prakash, Kushneel A. and Maiti, Dibyendu S. (2012) Has devaluation in 2009 improved Fiji's trade balance? UNSPECIFIED.

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Abstract

In an open economy, a deliberate reduction of exchange rate is considered to be an important policy option, not only to improve trade balance but also to gear up economic growth. The economy of Fiji has undertaken 20% reduction in the currency value in 2009. Although, it is too early to make conclusive statement, the trade balance seems to be improved marginally and contributed to the output growth. While exports registered an improvement, the imports also went up, leading to a weaker impact on the trade balance on the net. Domestic inflation has been limiting the effectiveness of devaluation partly, because it is highly influenced by the recent oil and food price rises on top of the increased money supply and trade costs. We argue that oil price rise tends to reduce output by raising the cost of production. Under such situation, a government usually employs expansionary policy to raise the effective demand. Fiscal instruments cannot be pursued effectively when the deficit is too high. So, the expansionary monetary policy has been deployed in order to raise investment level. Investment has not increased so far particularly on the major exportable sectors, but contributed much on the inflationary process. As a result, the transformation process from importable to exportable goods and services has been weak and limiting the effectiveness of devaluation. The investment has not increased mainly for two reasons. One, a drop in interest rate in an inflationary situation leads to a negative real interest rate which has limited the domestic saving and generated liquidity problems. Second, the liquidity problem raises risk and lack of confidence in investment. This appears to be a serious problem to sustain the improvement in trade balance

Item Type: Other
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Business and Economics (FBE) > School of Economics
Depositing User: Kushneel Prakash
Date Deposited: 23 Apr 2014 16:54
Last Modified: 10 Jan 2017 10:22
URI: http://repository.usp.ac.fj/id/eprint/7326
UNSPECIFIED

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