Working Paper: NBER ID: w2866
Authors: Sebastian Edwards; Peter Montiel
Abstract: This paper develops our analytical model to explore the relationship between the dynamics of macroeconomic adjustment and the timing of the implementation of an adjustment program featuring an official devaluation. The effects of postponing adjustment depend on the source of the original shock, In the case of fiscal expansion, postponement implies a larger eventual official 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 official devaluation, but does magnify the amount of post-devaluation overshooting by key macroeconomic variables.
Keywords: devaluation; macroeconomic adjustment; developing countries; fiscal policies; terms of trade
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal expansion (E62) | Size of official devaluation (F31) |
| Postponing adjustment (F32) | Size of official devaluation (F31) |
| Postponing adjustment (F32) | Magnitude of post-devaluation overshooting of macroeconomic variables (F31) |
| Terms of trade shocks (F14) | Size of official devaluation (F31) |