The Contractionary Short-Run Effects of Nominal Devaluation in Developing Countries: Some Neglected Nuances
AbstractThis paper extends the model developed by Krugman and Taylor (1978) to take into account interesting features of the evolving structure of global trade. The growing presence of transnational production chains and differential pricing behaviour of exports destined for industrial and developing countries are accommodated. Individual country and panel data pass-through estimates derived from several econometric approaches are provided to justify the latter extension. The likelihood of contractionary short-run effects of devaluations is shown to be positively related to: (1) the proportion of a country's exports destined for other developing countries, and (2) the presence of TNCs in either the export or home goods-producing sector. Unlike the Krugman-Taylor case, devaluation will generally have a contractionary impact even if: (1) trade is initially balanced, (2) consumption behaviour does not differ between wage and profit earners, and (3) the government sector has a high marginal propensity to consume in the short-run. The resulting policy implications underline the need to take into account these increasingly important nuances of international trade while designing exchange rate policies for developing countries. JEL Categories: F12, F14, F23, F41
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 InfoPaper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2005-09.
Date of creation: May 2005
Date of revision: Sep 2006
Differential pass-through elasticities; contractionary devaluations; transnational corporations; error correction models; autoregressive distributed lag models; structuralist models.;
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-14 (All new papers)
- NEP-DEV-2005-05-14 (Development)
- NEP-IFN-2005-05-14 (International Finance)
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.:
- Michael B. Devereux & Charles Engel, 2000.
"Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility,"
NBER Working Papers
7665, National Bureau of Economic Research, Inc.
- Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 765-783, October.
- Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 765-783.
- Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Working Papers 0016, University of Washington, Department of Economics.
- Michael B. Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility," Working Papers 042000, Hong Kong Institute for Monetary Research.
- Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Discussion Papers in Economics at the University of Washington 0016, Department of Economics at the University of Washington.
- Hsiao,Cheng, 2003.
"Analysis of Panel Data,"
Cambridge University Press, number 9780521522717, October.
- Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
- P. Krugman & L. Taylor, 1976.
"Contractionary Effects of Devaluations,"
191, Massachusetts Institute of Technology (MIT), Department of Economics.
- Carlos F. Diaz Alejandro, 1963. "A Note on the Impact of Devaluation and the Redistributive Effect," Journal of Political Economy, University of Chicago Press, vol. 71, pages 577.
- Muscatelli, V. A. & Stevenson, A. A. & Montagna, C., 1994. "Intra-NIE competition in exports of manufactures," Journal of International Economics, Elsevier, vol. 37(1-2), pages 29-47, August.
- Dornbusch, Rudiger, 1987.
"Exchange Rates and Prices,"
American Economic Review,
American Economic Association, vol. 77(1), pages 93-106, March.
- Faini, Riccardo & Clavijo, Fernando & Senhadji-Semlali, Abdel, 1992. "The fallacy of composition argument : Is it relevant for LDCs' manufactures exports?," European Economic Review, Elsevier, vol. 36(4), pages 865-882, May.
- J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
- Feinberg, Robert M, 2000. "The Role of International Discipline in Three Developing Economies: Exchange Rate Effects on Domestic Prices in Colombia, Korea, and Morocco," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 126-33, February.
- Jaewoo Lee, 1997. "The Response Of Exchange Rate Pass-Through To Market Concentration In A Small Economy: The Evidence From Korea," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 142-145, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Saunders).
If references are entirely missing, you can add them using this form.