TY - JOUR AU - Corsetti,Giancarlo AU - Pesenti,Paolo AU - Roubini,Nouriel AU - Tille,Cedric TI - Competitive Devaluations: A Welfare-Based Approach JF - National Bureau of Economic Research Working Paper Series VL - No. 6889 PY - 1999 Y2 - January 1999 UR - http://www.nber.org/papers/w6889 L1 - http://www.nber.org/papers/w6889.pdf N1 - Author contact info: Giancarlo Corsetti Faculty of Economics Cambridge University Sidgwick Avenue CB3 9DD Cambridge, Cambs United Kingdom Tel: +44(0)1223335235 E-Mail: giancarlo.corsetti@gmail.com Paolo A. Pesenti Federal Reserve Bank of New York 33 Liberty Street New York, NY 10045 Tel: 212/720-5493 Fax: 212/720-6831 E-Mail: paolo.pesenti@ny.frb.org Nouriel Roubini Department of Economics, KMC 7-83 Stern School of Business, New York University 44 West 4th Street New York, NY 10012 Tel: 212/998-0886 Fax: 212/995-4218 E-Mail: nroubini@stern.nyu.edu Cédric Tille Graduate Institute for International and Development Studies Department of Economics Pavillon Rigot, Avenue de la Paix 11 A 1202 Geneve, Switzerland Tel: 41229085928 Fax: 41227333049 E-Mail: cedric.tille@graduateinstitute.ch AB - This paper studies the mechanism of international transmission of exchange rate shocks within a 3-country Center-Periphery model, providing a choice-theoretic framework for the policy analysis and empirical assessment of competitive devaluations. If relative prices and terms of trade exhibit some flexibility conforming to the law of one price, a devaluation by one country is beggar-thy-neighbor relative to another country through its effects on cost-competitiveness in a third market. Yet, due to direct bilateral trade among the two countries, there is a large range of parameter values for which a country is better off by maintaining a peg in response to its partner's devaluation. If instead deviations from the law of one price are to be considered the dominant empirical paradigm, then the beggar-thy-neighbor effect based on competition in a third market may disappear. However, a country's devaluation has a negative welfare impact on the economies of its trading partners based on the deterioration of their export revenues and profits and the increase in disutility from higher labor effort for any level of consumption. ER -