Revisiting the exchange rate debate: the Jamaican experience

This paper examines the impact of exchange rate devaluation in an open island economy. By taking account of the non-stationarity of the variables, and identifying the consequent cointegrating relation, the long-run and short-run impacts are identified. The results suggest a significant and negative long-run elasticity of output in response to a devaluation of the real exchange rate. The short-run dynamics indicate that the real exchange rate makes fairly rapid adjustment when there is deviation from the long-run equilibrium relation. Such rapid response to any demand side shocks suggest that the Jamaican economy may be susceptible to Dutch Disease effects. Copyright © 2000 John Wiley & Sons, Ltd.