Devaluation, Inflation, and the Balance of Payments: A Short‐Run Monetary Approach

Mario I. Blejer

The Economic Record, 1979, vol. 55, issue 1, 33-40

Abstract: In this paper a model is presented to analyze, in a monetary setting, the effects of a once‐and‐for‐all adjustment in the exchange rate in a small economy committed to a fixed exchange‐rate system. The effects of such an adjustment are shown to be transitory. After a devaluation the domestic rate of inflation accelerates in relation to the rate of inflation in the rest of the world. The increase in prices reduces the real value of the nominal stock of money and, in order to restore real liquidity to its previous level, foreign‐exchange reserves start to flow into the country. However, as monetary equlibrium is reached, the flow of reserves tends to stop and the domestic rate of inflation converges to the world rate.

Date: 1979
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