The Jamaican dollar exchange rate is now at an all-time high of JA$131 to US$1, according to the Bank of Jamaica (BOJ). As of September 18, 2017, US$38.4 million was sold at an average rate of JA$131.10, while $43.7 million was bought at average price of $129.82.The fall in the value of the current against the US comes just one week after Jamaica borrowed approximately US$900 million from the International Monetary Fund (IMF) and other lending institutions. The IMF has forecasted that Jamaica will grow by 1.6 per cent this year, 0.4 per cent less than the previously forecasted two per cent and 3.4 per cent less than the country’s targeted five per cent growth per annum by the next three years as project by the Economic Growth Council.

Why can’t Jamaica grow how it wants to?

Jamaica is unable to improve its economic position due to several factors, including currency depreciation, which appears to be counter-intuitive to the nation’s growth pursuits. A constantly depreciating currency, it appears, disadvantageously increases the cost of imported inputs and the cost of foreign debt-servicing payments, thereby reducing national savings, which impedes the economy’s growth potential.

In this scenario, Jamaica and many other developing country that is in this position appear to be stuck in macroeconomic deadlock between proper foreign currency liquidity management, exchange rate determination, and gross domestic product (GDP) growth strategies needed for economic development. Read more in my book entitled Developing Sustainable Balance of Payments in Small Countries; Lessons from Macroeconomic Deadlock in Jamaica.

What does the theory say?

Traditionally, the effect of currency devaluation on economic growth in a country is examined within the predictions of the Mundell-Fleming model. In this model, GDP growth responds positively to currency depreciations through an increase in exports as a result of favourable domestic price advantage.

However, constant exchange rate depreciations in Jamaica over the last two decades have not resulted in any significant increase in aggregate output over time. This opens the issue to investigations beyond Mundell-Fleming.

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