Competitive Devaluations: A Welfare-Based Approach

Giancarlo Corsetti, Paolo Pesenti, Nouriel Roubini () and Cédric Tille

No 6889, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the mechanism of international transmission of exchange rate shocks within a 3-country Center-Periphery model, providing a choice-theoretic framework for the policy analysis and empirical assessment of competitive devaluations. If relative prices and terms of trade exhibit some flexibility conforming to the law of one price, a devaluation by one country is beggar-thy-neighbor relative to another country through its effects on cost-competitiveness in a third market. Yet, due to direct bilateral trade among the two countries, there is a large range of parameter values for which a country is better off by maintaining a peg in response to its partner's devaluation. If instead deviations from the law of one price are to be considered the dominant empirical paradigm, then the beggar-thy-neighbor effect based on competition in a third market may disappear. However, a country's devaluation has a negative welfare impact on the economies of its trading partners based on the deterioration of their export revenues and profits and the increase in disutility from higher labor effort for any level of consumption.

JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 1999-01
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Published as Corsetti, Giancarlo, Paolo Pesenti, Nouriel Roubini and Cedric Tille. "Competitive Devaluations: Toward A Welfare-Based Approach," Journal of International Economics, 2000, v51(1,Jun), 217-241.

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Working Paper: Competitive devaluations: a welfare-based approach (1999)
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