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Devaluation and Monetary Policy in Developing Countries: A General Equilibrium Model for Economies Facing Financial Constraints

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  • Liliana Rojas-Suarez

    (International Monetary Fund)

Abstract

The short-run response of output to devaluation and monetary policies is investigated for economies where firms are constrained to finance in advance their working capital by borrowing solely from domestic banks. It is shown that in contrast with traditional theories, but in accordance with recent theoretical and empirical analyses for developing countries, an anticipated devaluation or an anticipated decrease in the level of the exogenous component of money might result in a short-run output contraction even if prices fully adjust to clear markets. In addition, the paper analyses how output responds when a devaluation is unanticipated or when agents cannot distinguish between temporary and permanent monetary shocks.

Suggested Citation

  • Liliana Rojas-Suarez, 1987. "Devaluation and Monetary Policy in Developing Countries: A General Equilibrium Model for Economies Facing Financial Constraints," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 439-470, September.
  • Handle: RePEc:pal:imfstp:v:34:y:1987:i:3:p:439-470
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    Cited by:

    1. Pierre Jacquemot, 1989. "Rôle du taux de change dans l'ajustement d'une économie à faible revenu. Une revue de la littérature récente," Revue Tiers Monde, Programme National Persée, vol. 30(118), pages 357-402.
    2. Schweickert, Rainer, 1991. "Efficient real exchange rate adjustment in developing countries: alternative devaluation strategies, economic structure, and sequencing of reforms," Kiel Working Papers 473, Kiel Institute for the World Economy (IfW).

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