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Why Are Crisis-Induced Devaluations Contractionary? Exploring Alternative Hypotheses

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Author Info

  • Rajan, Ramkishen S.

    ()
    (George Mason University)

  • Shen, Chung-Hua

    ()
    (Department of Money and Banking)

Abstract

Why are some currency crises followed by economic contractions while others are not? This paper is an attempt at answering this query. In particular, we investigate two closely related questions. First, we explore whether there is a difference in the output effects of a devaluation during “normal” periods versus crises ones; after all, during non-crisis periods, real exchange devaluation is seen as an important policy option for promoting exports and output growth. Yet, the literature has not made a distinction between crisis and non-crisis periods. To preview the main conclusion, we find that the contractionary effects tend to exist only during the crisis period. Building on this, we go on to explore the factors that cause a crisis-induced devaluation to be contractionary.

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 21 (2006)
Issue (Month): ()
Pages: 526-550

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Handle: RePEc:ris:integr:0368

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Web page: http://econo.sejong.ac.kr/
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Related research

Keywords: Capital flows; Currency crisis; Contractionary devaluation; Speculative attack;

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References

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Citations

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Cited by:
  1. Ramkishen S. Rajan, 2006. "Managing New-Style Currency Crises: The Swan Diagram Approach Revisited," SCAPE Policy Research Working Paper Series 0517, National University of Singapore, Department of Economics, SCAPE.
  2. Cavoli, Tony, 2008. "The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics," Economic Modelling, Elsevier, vol. 25(5), pages 1011-1021, September.
  3. Ghosh, Amit & Rajan, Ramkishen S., 2009. "Exchange rate pass-through in Korea and Thailand: Trends and determinants," Japan and the World Economy, Elsevier, vol. 21(1), pages 55-70, January.
  4. Muhammad Shahbaz & Faridul Islam & Naveed Aamir, 2012. "Is devaluation contractionary? Empirical evidence for Pakistan," Economic Change and Restructuring, Springer, vol. 45(4), pages 299-316, November.
  5. Cavoli, Tony, 2009. "Is fear of floating justified?: The East Asia experience," Journal of Policy Modeling, Elsevier, vol. 31(1), pages 1-16.
  6. S. Rajan, Ramkishen, 2010. "The Evolution and Impact of Asian Exchange Rate Regimes," ADB Economics Working Paper Series 208, Asian Development Bank.
  7. Scott W Hegerty, 2013. "Exchange Market Pressure, Output Drops, and Domestic Credit: Do Emerging Markets Behave Differently?," Economics Bulletin, AccessEcon, vol. 33(4), pages 2583-2595.
  8. Pontines, Victor & Rajan, Ramkishen S., 2011. "Foreign exchange market intervention and reserve accumulation in emerging Asia: Is there evidence of fear of appreciation?," Economics Letters, Elsevier, vol. 111(3), pages 252-255, June.

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