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

International Monetary Fund

No 1989/011, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a small analytical model 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. In the case of a 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 post-devaluation overshooting by key macroeconomic variables.

Keywords: WP; exchange rate; devaluation crisis; official devaluation; devaluation episode; devaluation postponement; devaluation decision; devaluation period; devaluation point; terms of trade shock; Real exchange rates; Terms of trade; Real wages; Exchange rates; Domestic credit (search for similar items in EconPapers)
Pages: 38
Date: 1989-01-01
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Citations: View citations in EconPapers (4)

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