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Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries

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  • Sebastian Edwards

    (International Monetary Fund)

  • Peter J. Montiel

    (International Monetary Fund)

Abstract

A small analytical model is developed to explore the relationship between the dynamics of macroeconomic adjustment and the timing of the implementation of an adjustment program featuring a nominal devaluation. The effects of postponing adjustment depend on the source of the original shock. For fiscal expansion, postponement implies a larger eventual 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 devaluation but does magnify the degree of postdevaluation overshooting by key macroeconomic variables.

Suggested Citation

  • Sebastian Edwards & Peter J. Montiel, 1989. "Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 875-903, December.
    • Handle: RePEc:pal:imfstp:v:36:y:1989:i:4:p:875-903
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    Cited by:

    1. Graham Bird, 2004. "External Financing and Balance of Payments Adjustment in Developing Countries: Getting a Better Policy Mix," Palgrave Macmillan Books, in: International Finance and the Developing Economies, chapter 2, pages 14-33, Palgrave Macmillan.
    2. Sebastian Edwards, 2015. "Economic Development and the Effectiveness of Foreign Aid: A Historical Perspective," Kyklos, Wiley Blackwell, vol. 68(3), pages 277-316, August.
    3. Dapontas Dimitrios, 2014. "The Argentinian Peso Crisis (2014)," Scientific Annals of Economics and Business, Sciendo, vol. 61(2), pages 149-159, December.
    4. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, vol. 87(2), pages 216-231.
    5. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
    6. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    7. Ogbulu, Onyemachi Maxwell & Torbira, Lezaasi Lenee, 2017. "Transmission Effect of the Interaction between Parallel and Official Foreign Exchange Markets in Nigeria," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(6), pages 76-90, 06-2017.
    8. Diamandis, Panayiotis F. & Kouretas, Georgios P. & Zarangas, Leonidas, 2007. "Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries," Research in International Business and Finance, Elsevier, vol. 21(2), pages 238-259, June.
    9. Rudiger Dornbusch, 1995. "Progress Report on Argentina," NBER Chapters, in: Reform, Recovery, and Growth: Latin America and the Middle East, pages 223-238, National Bureau of Economic Research, Inc.
    10. Sweta Saxena & Kar-yiu Wong, 1999. "Currency Crises and Capital Control: A Survey," Working Papers 0045, University of Washington, Department of Economics.
    11. Eijffinger Sylvester C. W. & Goderis Benedikt, 2007. "Currency Crises, Monetary Policy and Corporate Balance Sheets," German Economic Review, De Gruyter, vol. 8(3), pages 309-343, August.
    12. repec:bla:germec:v:8:y:2007:i::p:309-343 is not listed on IDEAS
    13. Brana, Sophie & Chenaf-Nicet, Dalila, 2001. "Indicateurs avancés de crise de change : un examen critique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(4), pages 569-592, décembre.
    14. Ekanem, Nkanta Frank, 2002. "Differential impact of exchange rate on US trade with two major and two minor trading partners in Africa," Journal of Economics and Business, Elsevier, vol. 54(5), pages 557-571.
    15. Prof.Dr. Cevat GERNI & Doc.Dr. O. Selcuk EMSEN & Dr. M. Kemal DEGER, 2005. "Erken Uyari Sistemlerý Yoluyla Turkiye’Deki Ekonomik Krizlerin Analizi," Istanbul University Econometrics and Statistics e-Journal, Department of Econometrics, Faculty of Economics, Istanbul University, vol. 2(1), pages 39-62, November.
    16. Sebastian Edwards, 2005. "Establishing Credibility: The Role of Foreign Advisors," NBER Working Papers 11429, National Bureau of Economic Research, Inc.
    17. Kalyvitis, Sarantis C., 1997. "Evaluating the real effects of devaluation expectations in Greece under alternative policies," Economic Modelling, Elsevier, vol. 14(2), pages 215-236, April.
    18. Panayiotis Diamantis & Dimitris Georgoutsos & George Kouretas, 2001. "The Monetary Approach in the Presence of I(2) Components: A Cointegration Analysis of the Official and Black Market for Foreign Currency in Latin America," Working Papers 0108, University of Crete, Department of Economics.
    19. Eijffinger, S.C.W. & Goderis, B.V.G., 2005. "Currency Crisis, Monetary Policy and Corporate Balance Sheet Vulnerabilities," Discussion Paper 2005-113, Tilburg University, Center for Economic Research.
    20. Bodea, Cristina, 2010. "The political economy of fixed exchange rate regimes: The experience of post-communist countries," European Journal of Political Economy, Elsevier, vol. 26(2), pages 248-264, June.
    21. Dongchul Cho, 2012. "Responses of the Korean Economy to the Global Economic Crisis: Another Currency Crisis?," Chapters, in: Maurice Obstfeld & Dongchul Cho & Andrew Mason (ed.), Global Economic Crisis, chapter 3, Edward Elgar Publishing.
    22. Ahec Šonje, Amina, 1999. "Leading Indicators of Currency and Banking Crises: Croatia and the World," MPRA Paper 82574, University Library of Munich, Germany.

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