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Are Devaluations Really Contractionary?

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  • I.Igal Magendzo

Abstract

Given the theoretical disagreement on the effect of a devaluation on output, empirical evidence plays an fundamental role. Empirical findings have favored the view that devaluations are contractionary. In this paper the author argues that what stands behind these results is selection bias. In theory, the same variables that determine the probability of a devaluation determine the rate of growth of output. The author controls for selection bias using matching estimators and extensive dataset of 155 countries for the period 1970-1999 that includes as many as 264 devaluation episodes. Not controlling for selection bias, devaluations appear to becontractionary, in line with previous findings. Nevertheless, when the author controls for this bias, the contractionary effect vanishes. Extensive sensitivity analysis is provided.

Suggested Citation

  • I.Igal Magendzo, 2002. "Are Devaluations Really Contractionary?," Working Papers Central Bank of Chile 182, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:182
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    Cited by:

    1. Alvaro Aguirre & César Calderón, 2005. "Financial Frictions and Real Devaluations," Working Papers Central Bank of Chile 318, Central Bank of Chile.
    2. Bussière, Matthieu & Saxena, Sweta C. & Tovar, Camilo E., 2012. "Chronicle of currency collapses: Re examining the effects on output," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 680-708.

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