How does currency depreciation affect an economy regarding financial and trade channels?

Abstract

We delve into the impact of exchange rate depreciation on the change of economic growth rate through the new economic framework of classifying countries. The new method classifies countries into four types regarding their positions of the financial channel (the net foreign currency assets) and the trade channel (the global value chain). With empirical tests, we try to understand how the positions in two channels of economic activity play roles in determining countries' real economic growth under their macroeconomic states. Our results indicate that the balance sheet conditions and the location in the international trade network are crucial factors for a country to determine its economic growth rate in the pre-crisis period and during the crisis. However, we could not obtain the same evidence with data samples of the post-crisis period. Our results imply that an economic authority needs to set economic strategies concerning the balance of foreign currency denominated assets (or liabilities) not to lower the country's economic growth rate during the recession.