Recent studies have emphasized the role of valuation effects due to exchange rate movements in easing the process of adjustment of the external balance of a country. This paper asks to what extent valuation effects are desirable from a global perspective as a mean to achieve an efficient allocation of resources. In a frictionless world, it is desirable to have large movements in prices and exchange rates. But once a small concern for price stability is introduced not only should prices be stabilized but also the response of the exchange rate should be muted. There is a minor role for valuation effects that depends both on the size and composition of assets and liabilities.
*Published:
Beigno, Pierpaolo. “Are Valuation Effects Desirable from a Global Perspective?” Journal of Development Economics 89 (2009): 170-180.
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This paper was revised on June 6, 2007
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