To devaluate or not to devalue? How East European countries responded to the outflow of capital in 1997-99 and in 2008-09
If there is a negative terms of trade or financial shock leading to the deterioration in the balance of payments, there are two basic options for a country that has limited foreign exchange reserves. First, a country can maintain a fixed exchange rate (or even a currency board) and wait until the reduction of foreign exchange reserves leads to the reduction of money supply: this will drive domestic prices down and stimulate exports, raise interest rates and stimulate the inflow of capital, and finally will correct the balance of payments. Second, the country can allow the devaluation of national currency – flexible exchange rate will automatically bring the balance of payments back into the equilibrium. Because national prices are less flexible than exchange rates, the first type of adjustment is associated with the greater reduction of output. The empirical evidence on East European countries and other transition economies for 1998-99 period (outflow of capital after the 1997 Asian and 1998 Russian currency crises and slowdown of output growth rates) suggests that the second type of policy response (devaluation) was associated with smaller loss of output than the first type (monetary contraction). 2008-09 developments provide additional evidence for this hypothesis.
|Date of creation:||Jan 2011|
|Contact details of provider:|| Postal: 117418 Russia, Moscow, Nakhimovsky pr., 47, office 720|
Phone: +7 (495) 105 50 02
Fax: +7 (495) 105 50 03
Web page: http://www.cefir.ru
More information through EDIRC
References listed on IDEAS
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.:
- Steve H. Hanke, 2003. "The Argentine Straw Man: A Response to Currency Board Critics," Cato Journal, Cato Journal, Cato Institute, vol. 23(1), pages 47-57, Spring/Su.
- Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
- Jeffrey A. Frankel, 2008.
"The Estimated Effects of the Euro on Trade: Why Are They Below Historical Effects of Monetary Unions Among Smaller Countries?,"
NBER Working Papers
14542, National Bureau of Economic Research, Inc.
- Frankel, Jeffrey, 2008. "The Estimated Effects of the Euro on Trade: Why Are They Below Historical Effects of Monetary Unions Among Smaller Countries?," Working Paper Series rwp08-076, Harvard University, John F. Kennedy School of Government.
- Jeffrey A. Frankel, 2009. "The estimated effects of the euro on trade: why are they below historical effects of monetary unions among smaller countries?," LSE Research Online Documents on Economics 53362, London School of Economics and Political Science, LSE Library.
- Rose, Andrew, 1999.
"One Money, One Market: Estimating the Effect of Common Currencies on Trade,"
678, Stockholm University, Institute for International Economic Studies.
- Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers.
- Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
- Engel, Charles M & Rose, Andrew K, 2001.
"Currency Unions and International Integration,"
CEPR Discussion Papers
2659, C.E.P.R. Discussion Papers.
- Steve Hanke, 2002. "On dollarization and currency boards: Error and deception," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(4), pages 203-222.
- Nadja Kamhi & Vivek H. Dehejia, 2006.
"An Assessment of the Currency Board Regime in Bosnia and Herzegovina,"
Emerging Markets Finance and Trade,
M.E. Sharpe, Inc., vol. 42(6), pages 46-58, December.
- Nadja Kamhi & Vivek H. Dehejia, 2006. "An Assessment of the Currency Board Regime in Bosnia and Herzegovina," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 42(6), pages 46-58, December.
- Vivek H. Dehejia & Nadja Kamhi, 2005. "An Assessment of the Currency Board Regime in Bosnia and Herzegovina," Carleton Economic Papers 05-01, Carleton University, Department of Economics, revised Dec 2006.
- Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
- Eichengreen, Barry, 2001. "What problems can dollarization solve?," Journal of Policy Modeling, Elsevier, vol. 23(3), pages 267-277, April.
When requesting a correction, please mention this item's handle: RePEc:cfr:cefirw:w0154. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julia Babich)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.