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

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.
Publication date: January 1989
ISBN: 9781451925845
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Inflation , Money and Monetary Policy , exchange rate , terms of trade , foreign exchange , real exchange rates , real exchange rate

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