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Devaluation and the Balance of Trade

In: Do World Bank and IMF Policies Work?

Author

Listed:
  • Shahrukh Rafi Khan

    (Sustainable Development Policy Institute)

Abstract

Exchange-rate flexibility is generally recommended as part of structural adjustment packages to offset balance of trade deficits.2 However, according to Burton and Gilman (1991, p. 19), the IMF is eclectic. For example, if countries confront a chronic current account deficit and inflation is not a serious problem, a market-determined exchange rate may be endorsed. Alternatively, if coping with inflation is the priority, a pegged exchange rate could be recommended as a nominal anchor. Problems in the real world rarely come singly. Pakistan has struggled with both price stabilization and current account deficits. It adopted a managed float in 1982 and, as part of its structural adjustment reforms, has occasionally made discretionary changes in the exchange rate when confronted with low foreign exchange reserves, or when the value of the dollar has appreciated substantially in relation to other currencies. The obvious question is whether the evidence supports such policy action. The answer is that the evidence is decidedly mixed.

Suggested Citation

  • Shahrukh Rafi Khan, 1999. "Devaluation and the Balance of Trade," Palgrave Macmillan Books, in: Do World Bank and IMF Policies Work?, chapter 2, pages 32-47, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-37325-9_3
    DOI: 10.1057/9780230373259_3
    as

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