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Exchange Rate Devaluation: A Monetary Model and Empirical Investigation

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  • Parviz Asheghian
  • William G. Foote

Abstract

This paper uses a monetary approach to examine the impact of change s in the exchange rate, domestic credit, and gros s domestic product on the balance of payments during devaluation episodes of less develope d countries (LDCs) and advanced countries (ACs). Second, it estimates t he relative responsiveness of LDCs and ACs to devaluation. Using a sampl e of twenty-three independent devaluations in LDCs and thirteen independent devaluations in ACs, the analysis suggests several conclusions, two of which are: in the long run, devaluation improves the balance of payments for both ACs and LDCs; and the data cannot corroborate any structural differences between the relative responsiv eness of ACs and LDCs to devaluation in the short run.

Suggested Citation

  • Parviz Asheghian & William G. Foote, 1988. "Exchange Rate Devaluation: A Monetary Model and Empirical Investigation," Eastern Economic Journal, Eastern Economic Association, vol. 14(2), pages 181-187, Apr-Jun.
    • Handle: RePEc:eej:eeconj:v:14:y:1988:i:2:p:181-187
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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume14/V14N2P181_187.pdf
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    References listed on IDEAS

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    1. Connolly, Michael & Taylor, Dean, 1976. "Testing the Monetary Approach to Devaluation in Developing Countries," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 849-859, August.
    2. Dornbusch, Rudiger, 1973. "Currency Depreciation, Hoarding, and Relative Prices," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 893-915, July-Aug..
    3. Helpman, Elhanan, 1976. "Macroeconomic Policy in a Model of International Trade with a Wage Restriction," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 262-277, June.
    4. Jonson, P D & Kierzkowski, H I, 1975. "The Balance of Payments: An Analytic Exercise," The Manchester School of Economic & Social Studies, University of Manchester, vol. 43(2), pages 105-133, June.
    5. Richard K. Anderson & Akira Takayama, 1977. "Devaluation, the Specie Flow Mechanism and the Steady State," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(2), pages 347-361.
    6. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-654, November.
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