Devaluations and Growth: The Role of Financial Development

David Perez-Reyna and Filippo Rebessi
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Filippo Rebessi: California State University, East Bay

No 1118, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we rationalize the observation that in emerging markets an exchange rate devaluation might have a negative effect on production, due to the fact that the increase in the value of liabilities denominated in foreign currency causes a tightening in the domestic financial conditions, potentially offsetting the effect of an increase in the value of exports. We build on \cite{Melitz2003} to propose a model with heterogeneous firms in a small open economy where firms face financial frictions when borrowing from abroad. Depending on how strong the friction is, a foreign shock that results in an exchange rate devaluation might translate into lower output, even if exports increase.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:1118

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