Open AccessCan Devaluation Cause Perverse Effects if the Macroeconomy is Stable?
Author(s) -
Syed Mubashir Ali,
William Scarth
Publication year - 1994
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v33i4iipp.1033-1042
Subject(s) - devaluation , economics , presumption , balance of payments , exchange rate , work (physics) , monetary economics , current account , outcome (game theory) , macroeconomics , international economics , keynesian economics , microeconomics , mechanical engineering , law , political science , engineering
The theoretical literature on devaluation has involved anappeal to the Correspondence Principle for many years. In the earlywork, it was noted that a devaluation would improye the trade balanceonly if the Marshall-Lerner condition held, and this restriction wasalso necessary and sufficient for stability in the foreign exchangemarket. Thus, the presumption of economic stability precluded theperverse outcome. More recently, analysts have viewed this early work aslimited in that it considered only the aggregate demand effects of theexchange rate, and it did not consider more general specifications ofdynamics. The more recent work for example, Buffie (1986) and Lizondoand Montiel (1989) involves intermediate imports and a fully specifiedaggregate supply sector, and this work recognises that there are atleast two kinds of perverse results that can follow from devaluation:the balance of payments can worsen, and the level of employment canfall. (This latter outcome is the so-called contractionary devaluationpossibility.)