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Contractionary Devaluation, and Dynamic Adjustment of Exports and Wages

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  • Felipe Larrain
  • Jeffrey Sachs
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    Abstract

    Recent macroeconomic models of developing countries have emphasized the possibility of contactionary devaluations, stressing that domestic aggregate demand is likely to be reduced by the devaluations while aggregate supply may respond only slowly to the change in relative prices brought about by the devaluation. These results have been obtained in static models. In this paper we add wage and export-sector dynamics to the models of contractionary devaluation, and show that the effects which produce contractionary devaluations in the short term can produce limit cycles in the long run. The economy never returns to long-run equilibrium following a devaluation, but rather moves with fixed periodicity through successive phases of boom and bust.

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    File URL: http://www.nber.org/papers/w2078.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2078.

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    Date of creation: Nov 1986
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    Handle: RePEc:nbr:nberwo:2078

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    1. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
    2. Beckmann, Martin J & Ryder, Harl E, Jr, 1969. "Simultaneous Price and Quantity Adjustment in a Single Market," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 470-84, July.
    3. Dornbusch, Rudiger, 1975. "A portfolio balance model of the open economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 1(1), pages 3-20, January.
    4. Benassy, Jean-Pascal, 1984. "A non-Walrasian model of the business cycle," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 5(1), pages 77-89, March.
    5. Dornbusch, Rudi, 1996. "The Effectiveness of Exchange-Rate Changes," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 12(3), pages 26-38, Autumn.
    6. Carlos F. Diaz Alejandro, 1963. "A Note on the Impact of Devaluation and the Redistributive Effect," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 71, pages 577.
    7. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, Elsevier, vol. 8(3), pages 445-456, August.
    8. Hanson, James A., 1983. "Contractionary devaluation, substitution in production and consumption, and the role of the labor market," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 179-189, February.
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    Cited by:
    1. Ricardo N. Bebczuk & Ugo Panizza & Arturo Galindo, 2006. "An Evaluation of the Contractionary Devaluation Hypothesis," IDB Publications 6712, Inter-American Development Bank.

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