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Are Devaluations Really Contractionary?

  • I.Igal Magendzo
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    Given the theoretical disagreement on the effect of a devaluation on output, empirical evidence plays an fundamental role. Empirical findings have favored the view that devaluations are contractionary. In this paper the author argues that what stands behind these results is selection bias. In theory, the same variables that determine the probability of a devaluation determine the rate of growth of output. The author controls for selection bias using matching estimators and extensive dataset of 155 countries for the period 1970-1999 that includes as many as 264 devaluation episodes. Not controlling for selection bias, devaluations appear to becontractionary, in line with previous findings. Nevertheless, when the author controls for this bias, the contractionary effect vanishes. Extensive sensitivity analysis is provided.

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    Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 182.

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    Date of creation: Sep 2002
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    Handle: RePEc:chb:bcchwp:182
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    1. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
    2. Edward, Sebastian, 1986. "Are Devaluations Contractionary?," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 501-08, August.
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    4. Michael M. Hutchison, 2001. "A Cure Worse Than the Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs," NBER Working Papers 8305, National Bureau of Economic Research, Inc.
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    7. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
    8. Kruger, Mark & Osakwe, Patrick N. & Page, Jennifer, 1998. "Fundamentals, Contagion and Currency Crises: An Empirical Analysis," Working Papers 98-10, Bank of Canada.
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    12. Kamal Upadhyaya & Mukti Upadhyay, 1999. "Output effects of devaluation: Evidence from Asia," Journal of Development Studies, Taylor & Francis Journals, vol. 35(6), pages 89-103.
    13. Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42 National Bureau of Economic Research, Inc.
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    16. Richard Blundell & Monica Costa Dias, 2000. "Evaluation methods for non-experimental data," Fiscal Studies, Institute for Fiscal Studies, vol. 21(4), pages 427-468, January.
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    19. repec:chb:bcchwp:03 is not listed on IDEAS
    20. Upadhyaya, Kamal P., 1999. "Currency devaluation, aggregate output, and the long run: an empirical study," Economics Letters, Elsevier, vol. 64(2), pages 197-202, August.
    21. Gylfason, Thorvaldur & Risager, Ole, 1984. "Does devaluation improve the current account?," European Economic Review, Elsevier, vol. 25(1), pages 37-64, June.
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