Are Devaluations Contractionary?
AbstractRecently a number of authors have criticized the role of devaluations in traditional stabilization programs. It has been argued that, contrary to the traditional view, devaluations are contractionary, and generate a decline in aggregate output. In spite of the renewed theoretical interest in the possible contractionary effects of devaluations, the empirical evidence on the subject has been quite sketchy. In this paper the Khan and Knight (1981)model is extended to empirically address the issue of contractionary devaluations. The extended model considers the effect of money surprises, fiscal factors, terms of trade changes and devaluations on the level of real output. The results obtained, using a variance components procedure on data for 12 developing countries, provide some support to the short-run contractionary devaluation hypothesis; the results obtained indicate that in the short-run a devaluation will generate a decline in aggregate output. It is also found that after one year a devaluation will have an expansionary effecton output. The evidence suggests that in the long run, devaluations will have no effect on output.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by MIT Press in its journal Review of Economics & Statistics.
Volume (Year): 68 (1986)
Issue (Month): 3 (August)
Contact details of provider:
Web page: http://mitpress.mit.edu/journals/
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Katseli, Louka T, 1983. "Devaluation: A Critical Appraisal of the IMF's Policy Prescriptions," American Economic Review, American Economic Association, vol. 73(2), pages 359-63, May.
- Gylfason, Thorvaldur & Risager, Ole, 1984. "Does devaluation improve the current account?," European Economic Review, Elsevier, vol. 25(1), pages 37-64, June.
- Van Wijnbergen, Sweder, 1986.
"Exchange rate management and stabilization policies in developing countries,"
Journal of Development Economics,
Elsevier, vol. 23(2), pages 227-247, October.
- Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42 National Bureau of Economic Research, Inc.
- Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-54, November.
- Krugman, Paul & Taylor, Lance, 1978.
"Contractionary effects of devaluation,"
Journal of International Economics,
Elsevier, vol. 8(3), pages 445-456, August.
- Clements, Kenneth W. & Jonson, Peter D., 1979. "Unanticipated money, 'disequilibrium' modelling and rational expectations," Economics Letters, Elsevier, vol. 2(4), pages 303-308.
- McCallum, Bennett T, 1979. "On the Observational Inequivalence of Classical and Keynesian Models," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 395-402, April.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Karie Kirkpatrick).
If references are entirely missing, you can add them using this form.