An Empirical Comparison of Alternative Models of Currency Devaluations

Abstract

This paper seeks to determine empirically the mechanism by which the balance of payments is affected by a currency devaluation. Two theoretical strands in the literature, the elasticity approach and the monetary approach, are contrasted and data relating to 17 parity changes between 1957 and 1969 are used to evaluate the empirical relevance of each. The results are generally more favorable to the monetary approach. In particular it is found that the improvement in the balance of payments due to a devaluation is only temporary and that an excessively expansionary monetary policy may obliterate the improvement entirely.