Abstract
The post-crisis scenario requires careful consideration of conventional policy choices in emerging markets in the context of their specific circumstances with special regard to devaluation. Kumar highlights the role of two structural features of developing economies in determining policy outcomes: labor market segmentation between an organized formal sector subject to a binding wage floor and an informal sector with free entry, and the stylized mapping of this duality to goods markets with the preponderance of tradable (non-tradable) goods being produced in the formal (informal) sector. He identifies circumstances when devaluation is immiserizing and which cause differential wage effects across countries, and argues that institutional policies to integrate segmented labor markets can be an independent source of real exchange rate depreciation.
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