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The Dynamic Effect of Devaluation on the Balance of Payments of a Small Debt‐Ridden Open Economy

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  • D. T. NGUYEN

Abstract

This paper derives a precise necessary and sufficient condition for devaluation to eventually improve the balance of payments in domestic currency, using assumptions more appropriate for a small open economy than those of Marshall‐Lerner. It will be shown that, following devaluation, the balance of payments deteriorates over a short period before it gradually improves– the so‐called J‐curve effect The duration of this short period will be shown to depend on the magnitude of trade elasticities, lag‐coefficients, unhedged foreign debt denominated in foreign currency, interest rate and current account deficit

Suggested Citation

  • D. T. Nguyen, 1993. "The Dynamic Effect of Devaluation on the Balance of Payments of a Small Debt‐Ridden Open Economy," The Economic Record, The Economic Society of Australia, vol. 69(3), pages 285-294, September.
    • Handle: RePEc:bla:ecorec:v:69:y:1993:i:3:p:285-294
    DOI: 10.1111/j.1475-4932.1993.tb02108.x
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    References listed on IDEAS

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    1. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    2. Johnson, Harry G, 1976. "Elasticity, Absorption, Keynesian Multiplier, Keynesian Policy, and Monetary Approaches to Devaluation Theory: A Simple Geometric Exposition," American Economic Review, American Economic Association, vol. 66(3), pages 448-452, June.
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    Cited by:

    1. Dzanan, Haris & Masih, Mansur, 2017. "Does currency depreciation necessarily result in positive trade balance ? new evidence from Norway," MPRA Paper 82103, University Library of Munich, Germany.

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