NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Devaluations Contractionary?

Sebastian Edwards

NBER Working Paper No. 1676 (Also Reprint No. r0809)
Issued in August 1985
NBER Program(s):   ITI   IFM

Recently a number of authors have criticized the role of devaluations in traditional stabilization programs. It has been argued that, contrary to the traditional view, devaluations are contractionary, and generate a decline in aggregate output. In spite of the renewed theoretical interest in the possible contractionary effects of devaluations, the empirical evidence on the subject has been quite sketchy. In this paper the Khan and Knight (1981)model is extended to empirically address the issue of contractionary devaluations. The extended model considers the effect of money surprises, fiscal factors, terms of trade changes and devaluations on the level of real output. The results obtained, using a variance components procedure on data for 12 developing countries, provide some support to the short-run contractionary devaluation hypothesis; the results obtained indicate that in the short-run a devaluation will generate a decline in aggregate output. It is also found that after one year a devaluation will have an expansionary effecton output. The evidence suggests that in the long run, devaluations will have no effect on output.

download in pdf format
   (410 K)

email paper

This paper is available as PDF (410 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1676

Published: Edwards, Sebastian. "Are Devaluations Contractionary?" Review of Economics and Statistics, Vol. 68, No. 3, (August 1986), pp. 501-508.

Users who downloaded this paper also downloaded these:
Shi w12551 Are Currency Appreciations Contractionary in China?
Larrain and Sachs w2078 Contractionary Devaluation, and Dynamic Adjustment of Exports and Wages
Ito, Isard, and Symansky Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia
Frankel w11508 Contractionary Currency Crashes in Developing Countries
Edwards and Santaella Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us