In response to the Great Recession of 2007-2009, central bankers of various nations adopted expansionary monetary policies to revive their sluggish economies. In theory, these policies reduce interest rates and increase domestic investment and consumption spending, thus stimulating output and employment. Also, when interest rates decline, investors will pull their money out of the country in search of higher yields elsewhere, thus causing the country's currency to depreciate. Therefore, the prices of the country's exports decline, which results in rising exports to other nations, which boosts economic growth.

However, in the years following the Great Recession, things did not turn out exactly like economic theory predicts. Why? Recent evidence suggests that a fundamental  change has occurred in the structure of international trade  that reduces the impact of a depreciating currency on  trade flows. What has changed is where businesses source  the things they need to produce the goods they export. In  the past, manufacturers found most components needed  to produce their goods at home. Now they increasingly  look abroad for such inputs. As a result, exports now incorporate a lot more imports. This means that many products  are no longer "made in the United States" or in another  particular country. Instead, they are "made in the world." It is still the case that when a currency such as the yen  depreciates, it reduces the price of goods sold by Japanese producers in the United States. But it also increases  the price of the things that Japanese producers import to  make those exported goods. Therefore, the production  costs of Japanese producers increase and the competitiveness of their exports declines. As a result, depreciating currencies have a smaller effect on exports.
Economists at the Organization for Economic Cooperation and Development and the World Trade Organization have measured the impact of global supply chains on trade flows. In particular, they measured how much foreign content there is in each nation's exports, finding a sizeable increase since the mid-1990s. For example, the foreign content of Switzerland's exports increased from 17.5 percent in 1995 to 21.7 percent in 2011, while the imported content of South Korea's exports almost doubled, from 22.3 percent in 1995 to 41.6 percent in 2011. Using these figures, these economists found that the effect of currency movements on exports and imports has fallen over time, by as much as 30 percent in some countries. The implication of these findings is that as countries become more vertically integrated via global value chains, exchange rate variations will have a diminishing impact on trade flows. Thus, currency fluctuations will have a smaller role as shock absorbers that direct global demand toward weaker economies from stronger economies. Japan provides an example of how large currency depreciations do not deliver the export boost they once did. In 2013, the Bank of Japan enacted a massive stimulus program that increased the supply of yen and resulted in the currency's steep depreciation against the dollar and the euro. That strategy was a main component of Japan's arsenal of measures designed to boost the economy out of a long period of stagnation. But what followed was that the yen's depreciation had negligible effect on Japanese exports, thus failing to jump-start economic growth.
A similar pattern emerged following the European Central Bank's decision to enact its expansionary monetary policy in 2015 to boost economic growth by aiding exports. But once again, the impact of a weakened euro was modest. Simply put, the extent to which currency movements increase or decrease exports depends on how large their foreign content is. For the world economy as a whole, the foreign share of U.S. exports is at the lower end of the global range, at around 15 percent, compared with more than 25 percent in Germany.

What do you think? Does currency depreciation solve the economic problems of a country?