The devaluation controversy: the integration of monetary and real variables in a small open economy

Mathias Dewatripont, Marie Christine Adam, Françoise Thys-Clément and Denise Van Regemorter

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: Fiery economic debates about the effectiveness of devaluations have recently emerged in EMS and in other industrialized countries that maintain more or less officially pegged exchange rates. A rigorous assessment of this issue must pay careful attention to the interactions between real and financial variables since the latter shape the characteristics of short- and long-run equilibria in the foreign exchange market (Branson 1983, 1985; Dornbusch and Fischer 1980; Gylfason and Helliwell 1983). In this paper we present an application of a medium-term macromodel of the Belgian economy to the assessment of the February 1982 Belgian franc devaluation and its accompanying package of policy prescriptions (e.g. de-indexation). Real and financial effects as well as feedbacks from the exchange market.are taken into account since the model includes a fully endogenous foreign exchange market. The simulations presented in the paper allow us to show that the devaluation package tends to alleviate the major disequilibria characterizing the Belgian economy. But theyy also stress the small order of magnitude of the overall impact on the main macrovariables. © 1986.

Date: 1986
Note: SCOPUS: ar.j
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Published in: Journal of Policy Modeling (1986) v.1,p.53-67

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