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Exchange Controls, Devaluations and Real Exchange Rates: The Latin American Experience

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  • Sebastian Edwards

Abstract

This paper deals with the anatomy of devaluation in Latin America. In an effort to understand the economics surrounding the causes and consequences of exchange rate crises, eighteen devaluation episodes that took place between 1962 and 1982 are investigated in detail. The paper focuses on: (1) the relation between (inconsistent) macroeconomics policies and exchange rate crises; (2) the role of real exchange rate overvaluation in the precipitation of balance of payment crises under pre-determined nominal exchange rates; (3) the role of exchange controls, multiple exchange rates and black markets in the period preceding devaluations; and (4) the effectiveness of nominal devaluations as a way to restore real exchange rate equilibrium. A distinction is made between stepwise devaluations and crawling peg regime. It was found that historically most stepwise devaluations have had difficulty in sustaining a real devaluation over the medium term. Countries that adopted a crawling peg have generally been able to maintain a higher real exchange rate. In many cases, however, this has been achieved at the cost of substantial inflation.

Suggested Citation

  • Sebastian Edwards, 1987. "Exchange Controls, Devaluations and Real Exchange Rates: The Latin American Experience," NBER Working Papers 2348, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2348
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    1. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
    2. Sebastian Edwards, 1981. "The Demand for International Reserves and Exchange Rate Adjustments: The Case of LDC's, 1964-1972," UCLA Economics Working Papers 229, UCLA Department of Economics.
    3. Anne O. Krueger, 1978. "Foreign Trade Regimes and Economic Development: Liberalization Attempts and Consequences," NBER Books, National Bureau of Economic Research, Inc, number krue78-1, May.
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    7. Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
    8. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
    9. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
    10. Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February.
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