Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation

► A model which takes into account both the supply and demand-side effects of exchange rate variations is developed. ► Three kinds of expectations (adaptive, extrapolative and regressive) are considered. ► It is shown that the effect of currency depreciation on various economic variables depends largely on supply-side effects. ► In most cases, currency depreciation results in (i) a fall in output, (ii) an increase in prices and (iii) an improvement in the balance of trade. ► Under certain conditions, depreciation has a favorable effect on output but its effect on the balance of trade is negative.