Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries

Sebastian Edwards and Peter Montiel
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Sebastian Edwards: International Monetary Fund

IMF Staff Papers, 1989, vol. 36, issue 4, 875-903

Abstract: A small analytical model is developed to explore the relationship between the dynamics of macroeconomic adjustment and the timing of the implementation of an adjustment program featuring a nominal devaluation. The effects of postponing adjustment depend on the source of the original shock. For fiscal expansion, postponement implies a larger eventual devaluation and greater deviations of macroeconomic variables from their steady-state values. For adverse terms of trade shocks, postponement does not affect the size of the eventual devaluation but does magnify the degree of postdevaluation overshooting by key macroeconomic variables.

Date: 1989
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Working Paper: Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries (1989)
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