Working Paper: NBER ID: w2348
Authors: Sebastian Edwards
Abstract: This paper deals with the anatomy of devaluation in Latin America. In an effort to understand the economics surrounding the causes and consequences of exchange rate crises, eighteen devaluation episodes that took place between 1962 and 1982 are investigated in detail. The paper focuses on: (1) the relation between (inconsistent) macroeconomics policies and exchange rate crises; (2) the role of real exchange rate overvaluation in the precipitation of balance of payment crises under pre-determined nominal exchange rates; (3) the role of exchange controls, multiple exchange rates and black markets in the period preceding devaluations; and (4) the effectiveness of nominal devaluations as a way to restore real exchange rate equilibrium. A distinction is made between stepwise devaluations and crawling peg regime. It was found that historically most stepwise devaluations have had difficulty in sustaining a real devaluation over the medium term. Countries that adopted a crawling peg have generally been able to maintain a higher real exchange rate. In many cases, however, this has been achieved at the cost of substantial inflation.
Keywords: exchange controls; devaluations; real exchange rates; Latin America
JEL Codes: F31; F32; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inconsistent macroeconomic policies (E65) | exchange rate crises (F31) |
| expansive monetary policies (E63) | exchange rate crises (F31) |
| real exchange rate overvaluation (F31) | balance of payment crises (F32) |
| exchange controls (F38) | exacerbation of balance of payment crises (F32) |
| multiple exchange rates (F31) | exacerbation of balance of payment crises (F32) |
| nominal devaluations (F31) | restoration of real exchange rate equilibrium (F31) |
| nominal devaluations + unsustainable policies corrected (F31) | lasting real devaluations (F31) |