Click here for search results
Optimal devaluations
Author:Hevia, Constantino; Nicolini, Juan Pablo; Collection Title:Policy Research working paper ; no. WPS 4926
Country:World; Date Stored:2009/05/11
Document Date:2009/05/01Document Type:Policy Research Working Paper
SubTopics:Economic Theory & Research; Emerging Markets; Currencies and Exchange Rates; Economic Stabilization; Debt MarketsLanguage:English
Major Sector:FinanceRel. Proj ID:1W-Capital Flows And Financial Integration -- -- P053639;
Region:The World RegionReport Number:WPS4926
Sub Sectors:General finance sectorTF No/Name:TF040198-WORLD:; TF040145-WORLD:; TF090949-KCP HOW DO INSTITUTIONAL INVESTORS MANAGE WORLD SAVINGS?
Volume No:1 of 1  

Summary: According to the conventional wisdom, when an economy enters a recession and nominal prices adjust slowly, the monetary authority should devalue the domestic currency to make the recession less severe. The reason is that a devaluation of the currency lowers the relative price of non-tradable goods, and this reduces the necessary adjustment in output relative to the case in which the exchange rate remains constant. This paper uses a simple small open economy model with sticky prices to characterize optimal fiscal and monetary policy in response to productivity and terms of trade shocks. Contrary to the conventional wisdom, in this framework optimal exchange rate policy cannot be characterized just by the cyclical properties of output. The source of the shock matters: while recessions induced by a drop in the price of exportable goods call for a devaluation of the currency, those induced by a drop in productivity in the non-tradable sector require a revaluation.

Official Documents
Official, scanned versions of documents (may include signatures, etc.)
File TypeDescriptionFile Size (mb)
PDF 35 pagesOfficial version*2.45 (approx.)
TextText version**
How To Order

See documents related to this project
* The official version is derived from scanning the final, paper copy of the document and is the official,
archived version including all signatures, charts, etc.
** The text version is the OCR text of the final scanned version and is not an accurate representation of the final text.
It is provided solely to benefit users with slow connectivity.

Permanent URL for this page: