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Devaluation, Profitability and Investment

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  • Risager, Ole

Abstract

The role of devaluation in stimulating profitability, investment, and ec onomic activity is studied in a model characterized by forward-lookin g investment behavior and wage contracts that provide an element of s hort-term nominal wage rigidity. The analysis shows that, in the case where the real wage is restored through a post-devaluation negotiati on, devaluation leads to a cycle in the optimal investment rate and p ossibly also in the behavior of output. The trade-balance effect is u ncertain in the short run because devaluation increases both saving a nd investment. In the long run, all real variables are unaffected by devaluation. Copyright 1988 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Risager, Ole, 1988. "Devaluation, Profitability and Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(2), pages 125-140.
    • Handle: RePEc:bla:scandj:v:90:y:1988:i:2:p:125-40
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    Cited by:

    1. Chan, Tze-Haw, 2002. "Dynamic financial linkages among the Asia Pacific economies: an empirical assessment of real interest parity condition," MPRA Paper 34642, University Library of Munich, Germany.
    2. Paul R. Bergin, "undated". "Monetary Policy, Investment Dynamics, And The Intertemporal Approach To The Current Account," Department of Economics 97-13, California Davis - Department of Economics.
    3. AKITOBY, Bernardin, 1997. "Rigidité normale, dévaluation et équilibre général intertemporel," Cahiers de recherche 9708, Universite de Montreal, Departement de sciences economiques.
    4. Kim, Soyoung, 2001. "International transmission of U.S. monetary policy shocks: Evidence from VAR's," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 339-372, October.
    5. Hwan-Chyang Lin & Hui-Kuan Tseng, 1993. "Exchange rate shocks and the current account under monopolistic competition: An intertemporal optimization model," Open Economies Review, Springer, vol. 4(2), pages 133-150, June.

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