Contractionary Devaluation, and Dynamic Adjustment of Exports and Wages

Larraín B., Felipe; Sachs, Jeffrey D.

Recent macroeconomic models of developing countries have emphasized the possibility of contactionary devaluations, stressing that domestic aggregate demand is likely to be reduced by the devaluations while aggregate supply may respond only slowly to the change in relative prices brought about by the devaluation. These results have been obtained in static models. In this paper we add wage and export-sector dynamics to the models of contractionary devaluation, and show that the effects which produce contractionary devaluations in the short term can produce limit cycles in the long run. The economy never returns to long-run equilibrium following a devaluation, but rather moves with fixed periodicity through successive phases of boom and bust.


More About This Work

Academic Units
Earth Institute
National Bureau of Economic Research
NBER Working Paper, 2078
Published Here
September 29, 2009