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Canst Thou Beggar Thy Neighbour? Evidence from the 1930s
Does an exchange rate depreciation depress trading partners’ output? I address this question through the lens of a classic episode: from 1931 to 1936, the largest economies in the world successively devalued their currency. In theory, the effect is ambiguous for countries that had not devalued: expenditure switching can lower their output, but the monetary stimulus to foreign demand might raise it. Newly constructed high-frequency devaluation shocks and a multi-country model disciplined by cross-sectional evidence concur. Contrary to the popular narrative in modern policy debates, devaluation did not dramatically lower the output of trading partners in this context. Meanwhile, devaluation substantially raised the output of the devaluing country itself: it was a potent stimulus, not a zero-sum game.
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