NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Discrete Devaluation as a Signal to Price Setters

Louka T. Katseli

NBER Working Paper No. 1529
Issued in December 1984
NBER Program(s):The International Trade and Investment Program, The International Finance and Macroeconomics Program

The central hypothesis of this paper is that both the extent and speed of adjustment of the real exchange rate is affected by the way the central bank manages the nominal exchange rate. Specifically, a large discrete adjustment of the nominal exchange rate is more likely to result in fast adjustment of prices as opposed to a policy of smooth and continuous crawling peg. In the context of a monopolistic price adjustment framework, it is shown that a discrete and unexpected devaluation of the exchange rate shortens implicit price contracts and increases the rate of price adjustment in the nontraded goods sector, because firms tend to strengthen their expectations about an overall increase in costs and about an aggregate as opposed to a local shift in the demand curve for the firm's output. A discrete change in the exchange rate acts as an "information signal" that leads to fast overall adjustment of nontraded goods prices. The hypothesis is tested and not rejected at the macro, sectoral and firm level using macro and microdata on Greek prices prior to and after the January 1983 discrete devaluation.

download in pdf format
   (1122 K)

download in djvu format
   (485 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1529

Published: Katseli, Louka T. "Discrete Devaluations as a Signal to Price Setters: Suggested Evidence from Greece," Economic Adjustment and Exchange Rates in Developing Countries, edited by S. Edwards and Liquat Ahamed. Chicago: UCP ( 1986)

Users who downloaded this paper also downloaded* these:
Imberman, Kugler, and Sacerdote w15291 Katrina's Children: Evidence on the Structure of Peer Effects from Hurricane Evacuees
Branson and Katseli w0666 Currency Baskets and Real Effective Exchange Rates
Feenstra and Lewis w3845 Trade Adjustment Assistance and Pareto Gains From Trade
Campbell and Froot w4587 International Experiences with Securities Transaction Taxes
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

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

Contact Us