Contractionary effects of devaluation

Krugman, Paúl; Taylor, Lance

doi:10.1016/0022-1996(78)90007-7

Cited by 680 publications

(360 citation statements)

References 5 publications

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“…The underlying mechanisms behind the devaluation impact on consumption lies in the transfer of real income from workers to producers who have higher propensities to save out of factor income. Krugman and Taylor (1978) and Barbone and Rivera-Batiz (1987) have formalized the same view. The Krugman-Taylor paper formalizes several channels of contractionary influences, which are likely to prevail, particularly in developing countries.…”

Section: Literature Reviewmentioning

confidence: 87%

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Consumption and macroeconomic policies: Theory and evidence from developing countries

Kandil

Mirzaie

2006

The Journal of International Trade & Economic Development

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The paper examines determinants of private consumption in a sample of developing countries. The empirical model includes income, a proxy for the cost of consumption, and the exchange rate. Anticipated movements in these determinants are likely to affect planned consumption, while unanticipated changes determine cyclical consumption. Fluctuations in private consumption are mostly cyclical with respect to income and to a lesser extent the exchange rate. Consumption increases with income and decreases in the face of a higher cost. Currency fluctuations have mixed results on private consumption. As for the effects of domestic policies, fiscal policy has a limited and sometimes a negative effect on private consumption. Monetary growth, in contrast, stimulates an increase in private consumption.This evidence supports the calls to decrease the role of government and enhance the role of monetary policy to stimulate private activity in developing countries.

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Section: Literature Reviewmentioning

confidence: 87%

“…The latter group has a smaller marginal propensity to consume. Along the same lines, Krugman and Taylor (1978) and Barbone and Rivera-Batiz (1987) have formalized several channels of the contractionary effects of devaluation on private consumption.…”

mentioning

confidence: 99%

Consumption and macroeconomic policies: Theory and evidence from developing countries

Kandil

Mirzaie

2006

The Journal of International Trade & Economic Development

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“…They obtain a neutral income effect from monetary expansion in the real wage model, which results from the absence of the wealth effect. Krugman et al (1978) study the short-term effects of devaluation. They keep nominal wages fixed in domestic currency and get a contractionary output effect from devaluation, based on such factors as an initial trade balance deficit, differences in marginal consumption propensities from profits and wages, and export taxes.…”

Section: Resultsmentioning

confidence: 99%

When is money neutral under flexible exchange rates?

Ahtiala

2009

International Review of Economics & Finance

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The paper studies the conditions for the neutrality of money under flexible exchange rates in an extended real-wage Mundell-Fleming model, with special emphasis on the specification of the behavior functions to correspond to their foundations in closedeconomy macrotheory.It is shown that monetary expansion causes output first to decline, to eventually rise above its original level. However, if interest earnings on foreign securities dominate the trade balance in the expression for the exchange rate, monetary expansion leads to an appreciation of the exchange rate, while having an expansionary output effect.Money is neutral in the long run if either the wealth effect or foreign interest payments is abstracted from; if both are abstracted from, it is neutral also in the short run. Short and long-run neutrality results also if wealth consists only of foreign securities. The above responses hold both for net creditors and -with a minor qualificationdebtors. JEL classification number: F41

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“…First, devaluation can redistribute income from groups with a lower to a higher marginal propensity to save. This may lead to a decline in aggregate demand and output (Krugman and Taylor, 1978). Secondly, a nominal devaluation can decrease the aggregate demand through the negative real balance effect due to a higher price level, which in turn may decrease the level of output.…”

Section: Literature Reviewmentioning

confidence: 99%

The CFA Franc Devaluation and Output Growth in the Franc Zone

Constant

2012

International Journal of Financial Research

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The objective of this paper is to assess the relationship between the devaluation of the CFA franc and output growth in the Franc Zone (note1). Hinging on the works carried out in Latin America and Asia, the article employs a pool data model to verify, if the January 12th, 1994 CFA franc devaluation had an impact on the output growth in these countries. Our results show that this devaluation had no impact on output growth. This can be explained by the fact that the real adjustment which should have preceded it failed.

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Contractionary effects of devaluation

Cited by 680 publications

References 5 publications

Consumption and macroeconomic policies: Theory and evidence from developing countries

Consumption and macroeconomic policies: Theory and evidence from developing countries

When is money neutral under flexible exchange rates?

The CFA Franc Devaluation and Output Growth in the Franc Zone

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