Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries

Sebastian Edwards, Peter Montiel

NBER Working Paper No. 2866 (Also Reprint No. r1556)
Issued in April 1991
NBER Program(s):   ITI   IFM

This paper develops our analytical model to explore the relationship between the dynamics of macroeconomic adjustment and the timing of the implementation of an adjustment program featuring an official devaluation. The effects of postponing adjustment depend on the source of the original shock, In the case of fiscal expansion, postponement implies a larger eventual official devaluation and greater deviations of macroeconomic variables from their steady-state values. For adverse terms of trade shocks, postponement does not affect the size of the eventual official devaluation, but does magnify the amount of post-devaluation overshooting by key macroeconomic variables.

(1099 K)

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Published:

• International Monetary Fund Staff Papers, Vol. 36, No.4, pp. 875-903, (December 1989). ,
• Sebastian Edwards & Peter J. Montiel, 1989. "Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 875-903, December.

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