Effects Of Devaluation Research Articles

Macroeconomic Medium-Term Models in the Nordic Countries

This is the first major joint presentation of macroeconomic models of Denmark, Finland, Norway and Sweden. Its origin is a selection of the presentations at a seminar on macroeconomic modelling in the Nordic countries held in Lyngby, Denmark, 8-9 October 1984, sponsored by the Nordic Ministries of Finance.The book is concentrated around a thorough presentation of the main macroeconomic medium-term models used in government planning and policy-making in each of the four countries. These models are: in Denmark, ADAM, developed by the Central Statistical Office, in Finland, KESSU, developed within the Ministry of Finance, in Norway, MODAG, developed by the Central Bureau of Statistics, and in Sweden, EMMA, developed within the Ministry of Finance.An introduction to Nordic macroeconomic models is provided, as well as significant features of the institutional use of models within governments in these countries. On the basis of the data presented in the book, the effects of devaluation, wage increases and fiscal policy in the Nordic economies can be compared with each other as well as with other small open economies.

Contractionary Devaluation in Developing Countries: An Analytical Overview

The growing literature on whether devaluation has contractionary effects on output in developing countries is evaluated. The paper explores links between the exchange rate and real output within a unified, fairly general analytical framework that incorporates several of the developing country features cited in the literature. The analysis suggests that many of the arguments on both sides of the debate about contractionary devaluation require modification, that some potential effects have been ignored, and that the direction of the impact effects of devaluation on real output is ambiguous on analytical grounds.

Income taxes, supply-side effects, and currency devaluation

This paper makes a new attempt at examining the effects of devaluation. We find that the tax-induced aggregate supply effects usually ignored in the Keynesian analysis may be a crucial factor in explaining the empirical finding of contractionary devaluation.

MACROECONOMIC ADJUSTMENT IN DEVELOPING COUNTRIES

The short-run adjustment problem in developing countries involves both the improvement of the current account and the reduction of inflation. In both cases, the usual reason for adjustment is shown to be the fiscal deficit. The article distinguishes primary adjustment costs, which are inevitable, from secondary costs, which result, for example, from failure to devalue or from real wage rigidity. The article then analyzes the effects of expenditure reduction and currency devaluation on various sectors of the economy. Reducing inflation involves both an inflation tax replacement and a price adjustment problem, and “heterodox” policies designed to deal with the latter are discussed. If the fiscal deficit cannot be reduced, the article argues, improving the current account may be at the cost of increasing inflation and likewise reducing inflation may be at the cost of worsening the current account.

DO DEVALUATIONS IMPROVE THE TRADE BALANCE? THE EVIDENCE REVISITED

This paper reexamines the effectiveness of devaluation in trade balance adjustment. The question is addressed in a framework which improves the previous empirical literature in several respects. The evidence indicates that devaluations have been a successful tool in inducing trade balance adjustment. In particular, nominal devaluations are found to result in significant real devaluations that last for at least three years, and the real devaluation induces significant trade flows that are distributed over a two‐to three‐year period. The evidence comes from two different samples, 1953‐73 and 1975‐84, involving twenty‐seven countries and sixty devaluation episodes.

Economic Adjustment and Exchange Rates in Developing Countries

In spite of the attention paid exchange rates in recent economic debates on developing countries, relatively few studies have systematically analyzed in detail the various ramifications of exchange rate policy in these countries. In this new volume from the National Bureau of Economic Research, leading economists use rigorous models to tackle various exchange rate issues, while also illuminating policy implications that emerge from their analyses. The volume, divided into four main sections, addresses: the role of exchange rates in stabilization programs and the adjustment process; the importance of exchange rate policy during liberalization reform in developing countries; exchange rate problems relevant and unique to developing countries, illustrated by case studies; and the problems defining, measuring, and identifying determinants of real exchange rates. Authors of individual papers examine the relation between commercial policies and exchange rates, the role of exchange rate policy in stabilization programs, the effectiveness of devaluations as a policy tool, and the interaction between exchange rate terms of trade an capital flow. This research will not only prove crucial to our understanding of the role of exchange rates in developing countries, but will clearly set the standard for future work in the field.

Effects of stimulus content and postacquisition devaluation of the unconditioned stimulus on retention of human electrodermal conditioning and relational learning

Abstract The present experiment (W=72) employed a differential conditioning procedure to investigate the effects of fear-relevance of the conditioned stimulus (CS) and postacquisition exposure to the unconditioned stimulus (US) on the retention of human autonomic conditioning and relational learning. The CSs were pictures of snakes and spiders (fear-relevant) for half the subjects, and pictures of flowers and mushrooms (fear-irrelevant) for the other half. A delay conditioning procedure was employed with a GS-US onset interval of 8 sec. Following the acquisition phase, one group was exposed to 30 presentations of US-alone, another was exposed to 30 presentations of white noise, and a third group received no stimulation. The dependent variables were the skin conductance response (SCR) and a continuous measure of US expectancy. The results indicated that fear-relevant CSs elicited larger responses during the adaptation phase and resulted in greater first- and second-interval SCR conditioning than did fear-i...

In flight or in plight? The current state of audio visual departments in Australian CAEs

<span>Given that the Commonwealth Government intends to maximise the number of students in tertiary education with a minimum increase in funding, this research aimed to review the effects of reduced Government funding on the services of Audio Visual Departments between 1980 and 1986. This study sets a "bench mark" on the current state of Audio Visual Departments. The scenario formed by the responses is not encouraging. Funding cuts, static or reduced staff profiles, aging equipment and an increased demand for resource production and training courses are just a few of the problems facing managers of the Audio Visual Departments.</span><p>If Audio Visual Departments are to provide effective and efficient services to meet the demands of their institution's academic and administrative staff, and the students, then there must be immediate "catch up" funding to allow managers to replace obsolete equipment built up over the last eight to twelve years. The effects of devaluation and inflation must be recognised and adjustments made with each funding grant to Colleges of Advanced Education. Most importantly, institution management must work with the Audio Visual Department's clients to determine the level of service required from the Department to effectively support training and development of competent graduating students within all disciplines.</p>

The Effects of Collective Devaluation on Commodity Prices and Exports

Because measures to stimulate export production are often part of economic adjustment programs, the possible repercussions in particular commodity markets of collective actions by producers to encourage exports merit study. A simplified model is developed and used to simulate supply-side policies in the world market for a primary commodity to explore the policies' effects on prices, volumes, and export receipts over a decade. Although the potential for adverse effects exists, this finding is not an argument against devaluation, since the beneficial effects of such a policy in other areas might outweigh the short-run effect on major commodity exports.

Exchange Rate Reform and Structural Disturbances in a Dual Exchange Rate Economy

This paper analyzes the implications of devaluation and a variety of structural disturbances in a dual exchange rate economy. A key feature of the model developed is its explicit recognition of both private (fraudulent) and officially-sanctioned cross transactions between the two exchange markets. The principal lesson to be learned from the analysis is that popular notions as to the effects of devaluation or of other disturbances are to be viewed with considerable caution when the dual rate regime involves inter-market transactions.

Stabilization policy and income distribution in developing countries

The trade-off between income distribution and stabilization is one of the least understood in development economics. The paper reviews the recent literature on the effects of devaluation and monetary and fiscal policy. Devaluation is shown to have a significant impact on incomes through both its expenditure switching and reducing effects, this varying with the time perspective taken. The implications of these effects for poverty are explored, and shown in principle to be complex and uncertain. Similarly, monetary and fiscal restraint is shown to influence income distribution through changes in the level and structure of output. How changes in monetary and fiscal policy affect the poor in developing countries is again difficult to determine theoretically. The labor market is shown to be a key determinant of how policy changes are transmitted to poverty groups. The paper concludes that rigorous empirical research on this subject is long overdue.

Devaluation, Devaluation Expectations and Price Dynamics

This paper investigates the inflationary impact of actual and expected de valuations. The empirical evidence indicates that (1) the effects of devaluation on the price level are felt for at least three years; (2) in the majority of the cases, the ceteris paribus inflationary impac t of devaluation is mild; (3) significant differences concerning the devaluation-inflation relationship exist across countries but there i s little evidence to suggest that such differences exist, in general, across time within a country; and (4) the anticipation of devaluatio n can have severe inflationary consequences and can lead to price lev el overshooting. Copyright 1987 by The Review of Economic Studies Limited.

Exchange Controls, Devaluations, and Real Exchange Rates: The Latin American Experience

This paper deals with the anatomy of devaluation in Latin America. In an effort to understand the economics surrounding the causes and consequences of exchange rate crises, eighteen devaluation episodes that took place between 1962 and 1982 are investigated in detail. The paper focuses on: (1) the relation between (inconsistent) macroeconomics policies and exchange rate crises; (2) the role of real exchange rate overvaluation in the precipitation of balance of payment crises under pre-determined nominal exchange rates; (3) the role of exchange controls, multiple exchange rates and black markets in the period preceding devaluations; and (4) the effectiveness of nominal devaluations as a way to restore real exchange rate equilibrium. A distinction is made between stepwise devaluations and crawling peg regime. It was found that historically most stepwise devaluations have had difficulty in sustaining a real devaluation over the medium term. Countries that adopted a crawling peg have generally been able to maintain a higher real exchange rate. In many cases, however, this has been achieved at the cost of substantial inflation.

Foreign capital and the contractionary impact of currency devaluation, with an application to Jamaica

This paper analyses the effects of currency devaluation in a small open economy host to foreign capital. Using a short-run macroeconomic model of the Krugman-Taylor (1978) type, it is shown that the presence of foreign capital provides devaluation with an additional contractionary mechanism, besides those already identified in the literature. The mechanism has its basis on the redistribution of income from wages to profits creasted by devaluation, which raises the foreign component of domestic income and tends to reduce GNP and GDP. The role of taxation policy in this context is examined. Finally, estimates of the relevant effects are offered for Jamaica, a small mineral exporter, showing that an expansionary effect of devaluation must rely on a relatively high value of the supply elasticity of non-mineral exports.

The J‐Curve

AbstractIf a country with a balance of payments problem, that is, insufficient foreign exchange receipts to meet foreign exchange requirements, seeks to remedy the situation by currency devaluation, things may get worse before they get better. This so‐called J‐curve effect occurs if the domestic‐currency prices of exports are sticky, whether because they are cost based or subject to longer term contracts, so that export prices in foreign currency fall. Until favourable volume effects outweigh the unfavourable price effect, the balance of payments deteriorates. Such a J‐curve effect should be distinguished both from the longer term erosion of the beneficial effects of devaluation as domestic costs and the prices of non‐tradables rise and from the apparent J‐curve due to the ‘valuation effect’. If the current account is in deficit before devaluation, as will usually be the case, devaluation will widen the deficit in domestic currency because domestic‐currency imports rise by a larger amount than exports. This is a pure valuation effect, of no significance for external balance. But it is liable to lead to unduly pessimistic judgements about the effectiveness of devaluation. In Australia during 1985–86, the current account deficit increased by $A3.5 billion, despite substantial depreciation of the $A. The main reason was a sharp deterioration in the terms of trade which is estimated to have worsened the current account by $A4.25 billion. Most of this was exogenous, though J‐curve effects may have made a contribution. In addition, the valuation effect contributed a further, illusory, widening of the deficit, valued in domestic currency, by over $A1 billion. To avoid misleading inferences from the valuation effect, it is suggested that the balance of payments should, if possible, be presented in foreign currency.

Devaluation, Fiscal Deficits, and the Real Exchange Rate

This article examines the use of fiscal policies to sustain the effects of a nominal devaluation on the real exchange rate. It is shown that the magnitude of the change in the real exchange rate depends not only on the size of the devaluation and the degree of fiscal adjustment but also on the means by which the fiscal deficit is reduced. The change in the nominal exchange rate necessary to maintain the depreciation of the real exchange rate will depend on whether the fiscal deficit is eliminated by increasing taxes or by reducing government expenditures on traded and nontraded goods. The required depreciation of the domestic currency will be larger if the fiscal deficit is reduced by increasing taxes than it will be if the deficit is cut by lowering government expenditures. Further, the depreciation would be smaller if the cuts in expenditure fell on traded rather than nontraded goods. This result implies that the authorities must ensure consistency between exchange rate action and policies to reduce fiscal imbalances in order to achieve a desired level of the real exchange rate necessary to attain balance of payments equilibrium. The real exchange rate represents a key relative price in the economy and policies to change it are often the centerpiece of adjustment programs designed to improve international competitiveness and shift resources toward the production of tradable goods. Consequently, it is critical for policymakers to have some idea of the magnitude and time path of the likely response of the real exchange rate to nominal exchange rate action. It is a well-accepted proposition, however, that a nominal devaluation will only have a transitory effect on the real exchange rate. In the long run domestic wages and prices will rise by the full amount of the devaluation and the real exchange rate will return to its original level. To alter the real exchange rate on a permanent basis, therefore, devaluation has to be supplemented by policies that restrain the increase in domestic factor costs that results from a devaluation. Generally speaking, the effects of a devaluation on the real exchange rate can

The Simultaneity of the Effects of Devaluation: Implications for Modified Planned Economies

The paper attempts to provide a clearer conceptual basis for exchange rate policymaking in modified planned economies (MPEs), by clarifying the interactions involved in the simultaneous determination of the price level, terms of trade, real income and trade balance effects of a devaluation. Using a three-good model, it is shown that existing empirical estimates of trade elasticities in MPEs may be downwardly based, and that extreme pessimistic assessments of the effects of devaluation may not be entirely internally consistent. Although trade elasticities in MPEs probably are lower than in market economies, they could be raised by measures aimed at expanding factor mobility and enterprise autonomy.

Contractionary devaluation in the southern cone: The case of Chile

This paper discusses the effects of a currency devaluation on output, employment and the trade balance in a small open economy (Chile). The structure of the foreign trade sector in terms of price elasticities, the sectoral differences in relative domestic value added intensities across exports and import competing industries and the degree of wage indexation, are the main determinants, in our model, of the impact of devaluation. A simulation carried out with a computable macro model for Chile, shows a currency devaluation to be contractionary in the short to medium run.

Macroeconomic issues for Latin America

Recent macroeconomic issues in Latin America are reviewed, with an emphasis on theory. Topics covered include multiple equilibria from hysteresis or increasing returns, exchange rate management and the output and asset market effects of devaluation, speculation, interest rate management and financial reform, government behavior, income distribution and growth, inertial inflation and heterodox policy shocks, and disequilibrium theories.

Government policy with deficit financing, imperfect capital mobility and exchange rate effects on the supply side

This paper examines the impact of monetary and fiscal policy when supply-side effects of prices as well as exchange rates are taken into account in an open economy macro model. Partial deficit financing and imperfect international capital movements are appropriately modelled. It is shown that the well known Mundell–Fleming result, that fiscal policy is completely ineffective under perfect capital mobility and flexible exchange rates, is significantly affected when exchange rate effects on the supply side are taken into account. The paper also shows that such effects significantly alter the effects of devaluation under fixed exchange rates.