Ah. Hallett et Y. Ma, ARE CURRENCY DEVALUATIONS NECESSARILY BAD - NEW KEYNESIAN ARGUMENTS FOR INTERVENTION RATHER THAN MONETARIST ORTHODOXY, International Journal of Systems Science, 25(5), 1994, pp. 893-908
Citations number
14
Categorie Soggetti
System Science","Computer Science Theory & Methods","Operatione Research & Management Science
Traditional monetarist thinking argues that currency devaluations are
counterproductive because they generate additional inflationary pressu
res. Expectations that future inflation will have to be accommodated u
ndermine the credibility (and hence effectiveness) of current monetary
policies. However, these arguments neglect the impact on activity lev
els and whether there is spare capacity. Hard (or contractionary) mone
tary policies in recession will cause an equal loss of credibility wit
h investors and forward-looking consumers who will make their expendit
ures elsewhere. These are therefore circumstances when currency devalu
ation could be helpful, and without inflationary consequences if risin
g productivity and spate capacity offset import price rises. Moreover,
devaluation within a currency bloc can leave the effective exchange r
ate unchanged if the bloc is rising against external currencies; while
boosting demand at the same time if the within-bloc import/export ela
sticities are higher than those outside. This paper tests these argume
nts econometrically, and shows that the conditions for a successful St
erling devaluation did exist in 1992.