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Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries

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  • Sebastian Edwards

    (International Monetary Fund)

  • Peter J. Montiel

    (International Monetary Fund)

Abstract

A small analytical model is developed to explore the relationship between the dynamics of macroeconomic adjustment and the timing of the implementation of an adjustment program featuring a nominal devaluation. The effects of postponing adjustment depend on the source of the original shock. For fiscal expansion, postponement implies a larger eventual devaluation and greater deviations of macroeconomic variables from their steady-state values. For adverse terms of trade shocks, postponement does not affect the size of the eventual devaluation but does magnify the degree of postdevaluation overshooting by key macroeconomic variables.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 36 (1989)
Issue (Month): 4 (December)
Pages: 875-903

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Handle: RePEc:pal:imfstp:v:36:y:1989:i:4:p:875-903

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References

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  1. Khan, Mohsin S & Lizondo, J Saul, 1987. "Devaluation, Fiscal Deficits, and the Real Exchange Rate," World Bank Economic Review, World Bank Group, vol. 1(2), pages 357-74, January.
  2. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
  3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  4. Aizenman, Joshua, 1985. "Adjustment to monetary policy and devaluation under two-tier and fixed exchange rate regimes," Journal of Development Economics, Elsevier, vol. 18(1), pages 153-169.
  5. Rudiger Dornbusch, 1986. "Special Exchange Rates for Capital Account Transactions," NBER Working Papers 1659, National Bureau of Economic Research, Inc.
  6. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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Citations

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Cited by:
  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  2. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, vol. 87(2), pages 216-231.
  3. Sweta Saxena & Kar-yiu Wong, 1999. "Currency Crises and Capital Control: A Survey," Discussion Papers in Economics at the University of Washington 0045, Department of Economics at the University of Washington.
  4. Kalyvitis, Sarantis C., 1997. "Evaluating the real effects of devaluation expectations in Greece under alternative policies," Economic Modelling, Elsevier, vol. 14(2), pages 215-236, April.
  5. Prof.Dr. Cevat GERNI & Doc.Dr. O. Selcuk EMSEN & Dr. M. Kemal DEGER, 2005. "Erken Uyari Sistemlerý Yoluyla Turkiye’Deki Ekonomik Krizlerin Analizi," Istanbul University Econometrics and Statistics e-Journal, Department of Econometrics, Faculty of Economics, Istanbul University, vol. 2(1), pages 39-62, November.
  6. Bird, Graham, 1997. "External financing and balance of payments adjustment in developing countries: Getting a better policy mix," World Development, Elsevier, vol. 25(9), pages 1409-1420, September.
  7. Sebastian Edwards, 2005. "Establishing Credibility: The Role of Foreign Advisors," NBER Working Papers 11429, National Bureau of Economic Research, Inc.
  8. Bodea, Cristina, 2010. "The political economy of fixed exchange rate regimes: The experience of post-communist countries," European Journal of Political Economy, Elsevier, vol. 26(2), pages 248-264, June.
  9. Brana, Sophie & Chenaf-Nicet, Dalila, 2001. "Indicateurs avancés de crise de change : un examen critique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(4), pages 569-592, décembre.
  10. Diamandis, Panayiotis F. & Kouretas, Georgios P. & Zarangas, Leonidas, 2007. "Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries," Research in International Business and Finance, Elsevier, vol. 21(2), pages 238-259, June.
  11. Ekanem, Nkanta Frank, 2002. "Differential impact of exchange rate on US trade with two major and two minor trading partners in Africa," Journal of Economics and Business, Elsevier, vol. 54(5), pages 557-571.
  12. Panayiotis Diamantis & Dimitris Georgoutsos & George Kouretas, 2001. "The Monetary Approach in the Presence of I(2) Components: A Cointegration Analysis of the Official and Black Market for Foreign Currency in Latin America," Working Papers 0108, University of Crete, Department of Economics.

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