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Devaluations and Consumption Smoothing

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  • Paul R. Bergin

Abstract

The paper considers the effect of a nominal exchange rate devaluation on the current account, using an intertemporal model that highlights the interaction between leisure and consumption. An analytical solution demonstrates that household behavior may differ markedly from the simple consumption smoothing emphasized in most previous literature. This distinction has special significance for demand shocks, in which output rises through a rise in labor input and hence a fall in leisure. In particular, consumption tends to move closely with increased output in this context, so a devaluation tends not to improve the current account. This result may cast doubt on the effectiveness of competitive devaluations.

Suggested Citation

  • Paul R. Bergin, 2003. "Devaluations and Consumption Smoothing," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 875-884, November.
    • Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:875-884
    DOI: 10.1046/j.1467-9396.2003.00423.x
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    Cited by:

    1. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    2. Sajid Anwar & Desh Gupta, 2006. "Financial Restructuring and Economic Growth in Thailand," Global Economic Review, Taylor & Francis Journals, vol. 35(1), pages 113-127.

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