Are Devaluations Expansionary in Laos

This study investigates whether currency devaluation is expansionary for Laos. We combine cointegration and vector error correction method (VECM) Granger causality analysis to examine long-run and causal relationships among selected macroeconomic variables. Our results confirm the presence of cointegration among the variables and support expansionary effects of currency devaluation on economic growth of Laos. Government spending increases economic growth but money supply decreases the growth. World income is inversely linked with Laos’ economic growth. Our evidence supports the devaluation-led growth hypothesis.