ON THE THEORY OF THE DEVALUATION BIAS*

Don E. Roper

Kyklos, 1972, vol. 25, issue 2, 315-325

Abstract: Government authorities outside the U. S. have two important incentives to hold the values of their currencies in terms to dollars below the equilibrium rate. First, their export and import competing industries are able to place considerable political pressure on the authorities to keep an undervalued rate whereas consumer interests are so diffuse that they exert little pressure for an overvalued rate. Secondly, the authorities themselves would rather have too many reserves than too few. This paper demonstrates that these two forces do not produce a devaluation bias against the dollar except over a transitional period.

Date: 1972
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