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Why do Governments Delay Devaluation?

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  • Graham Bird
  • Thomas D. Willett

Abstract

In the sequence of currency crises in emerging economies in the 1990s, there was an observed reluctance to devalue the exchange rate. Although ultimately adopted, the decision to devalue was usually delayed, often until it could no longer be avoided. While economic explanations of delay are available, they need to be combined with an evaluation of the political implications in order to secure a better understanding of exchange rate inertia. This article presents a political economy interpretation of delayed devaluation. It introduces and discusses the determining factors drawing on available empirical evidence and briefly applies these ideas to a range of specific examples. It also examines why there may be even more impediments in the way of timely revaluation. Since delayed exchange rate adjustment carries economic costs, the article also considers ways in which delay may be minimised.

Suggested Citation

  • Graham Bird & Thomas D. Willett, 2008. "Why do Governments Delay Devaluation?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 9(4), pages 55-74, October.
  • Handle: RePEc:wej:wldecn:354
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    Cited by:

    1. repec:wsi:jicepx:v:08:y:2017:i:01:n:s1793993317500041 is not listed on IDEAS
    2. Thomas D. Willett & Orawan Permpoon & Clas Wihlborg, 2010. "Endogenous OCA Analysis and the Early Euro Experience," The World Economy, Wiley Blackwell, vol. 33(7), pages 851-872, July.
    3. Willett, Thomas D. & Srisorn, Nancy, 2014. "The political economy of the Euro crisis: Cognitive biases, faulty mental models, and time inconsistency," Journal of Economics and Business, Elsevier, vol. 76(C), pages 39-54.
    4. Menna Bizuneh & Neven Valev, 2014. "The Devil you Know: Pegs vs Floats with Uncertain Outcomes," Review of International Economics, Wiley Blackwell, vol. 22(4), pages 686-699, September.

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