Classifying the Economy into Traded or Nontraded Sectors

Cast within the framework of small open economy that periodically faces balance of payments crises, the theoretical model developed in this study can be utilized to study the devaluation experiences of the Philippines. Such model provides not only a test for validity and relevance but also an indication of the costs of devaluation as a tool for achieving external balance.trade sector, devaluation, balance of payments

Financial Frictions and Real Devaluations

In this paper I study the effects of real exchange rate devaluations on output performance using a sample of large devaluation episodes for a group of emerging and developed countries. I find that balance sheet effects, captured by the interaction between the real exchange rate devaluation and the level of external indebtedness of the country, have a significant and negative impact on output. Nevertheless, there is also evidence of a positive effect of the real devaluation associated to the traditional expansionary effect. For countries with large foreign-denominated external debt, the combined effect of the real exchange rate depreciation is likely to generate significant output losses in the short-run. However, in the medium term, the expansionary effect of the real devaluation tends to dominate the balance sheet effect, which implies a positive effect on output in the medium term. Finally, countries with deeper financial market experience lower output losses following a devaluation.

Devaluation (levels versus rates) and balance of payments in a cash-in-advance economy

This paper investigates the consequences of the currency devalution, both in levels and rates, on the balance of payments in a cash-in-advance economy with finite horizons, endogenous capital accumulation and international capital immobility. In this context, a once and for all currency devaluation induces a balance of payments surplus, whereas a sustained increase in the rate of devaluation produces, in principle, an ambiguous effect on the balance of payments. If however non-restrictive assumptions on some structural parameters are made, an increase in the devaluation rate leads to a balance of payments surplus, the exact opposite of Calvo's result (1981).Devaluation; Balance of payments; Cash-in-advance constraint; Overlapping generations.

Why is Inflation so Low after Large Devaluations?

This paper studies the behavior of inflationnafter nine large post-1990 contractionary devaluations. A salient feature of the data is that inflation is low relative to the rate of devaluation. We argue that distribution costs and substitution away from imports to lower quality local goods can account quantitatively for the post-devaluation behavior of prices.inflation, devaluation, exchange rates

Exports and Wages: Rent Sharing, Workforce Composition or Returns to Skills?

We use linked employer-employee data from Italy to explore the relationship between exports and wages. Our empirical strategy exploits the 1992 devaluation of the Italian Lira, which represented a large and unforeseen shock to Italian firms’ incentives to export. The results indicate that the export wage premium is due to exporting firms both (a) paying a wage premium above what their workers would earn in the outside labor market – the “rent-sharing” effect, and (b) employing workers whose skills command a higher price after the devaluation – the “skill composition” effect. The latter effect only emerges once we allow for the value of individual skills to differ in the pre and post-devaluation periods. In fact, using a fixed measure of skills, as typically done in the literature, we would attribute the wage increase only to rent sharing. We also document that the export wage premium is larger for workers with more export-related experience. This indicates that the devaluation increased the demand for skills more useful for exporting, driving their relative price up

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

This paper develops our analytical model to explore the relationship between the dynamics of macroeconomic adjustment and the timing of the implementation of an adjustment program featuring an official devaluation. The effects of postponing adjustment depend on the source of the original shock, In the case of fiscal expansion, postponement implies a larger eventual official 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 official devaluation, but does magnify the amount of post-devaluation overshooting by key macroeconomic variables.

Classifying the Economy into Traded or Nontraded Sectors

Cast within the framework of small open economy that periodically faces balance of payments crises, the theoretical model developed in this study can be utilized to study the devaluation experiences of the Philippines. Such model provides not only a test for validity and relevance but also an indication of the costs of devaluation as a tool for achieving external balance.trade sector, devaluation, balance of payments

Debt Composition and Balance Sheet Effects of Exchange Rate Volatility in Mexico: A Firm Level Analysis

We use Mexican firm-level data to study the role of currency mismatches in exacerbating the negative effects of a devaluation in the corporate sector and to investigate what drives Mexican firms to borrow in foreign currency. Our results show that large firms and exporters tend to borrow more heavily in foreign currency. The presence of foreign currency denominated debt poses a significant risk to balance sheets at the time of devaluation. Our findings suggest that in Mexico, the balance sheet effects of a devaluation far outweigh the competitiveness effects.

Is devaluation contractionary? empirical evidence for Pakistan

The paper investigates the effect of real devaluation on economic growth. In the empirical model we also include other theoretically justified variables in the case of Pakistan, such as foreign remittances, money supply, and government spending. The paper implements the ADF method to test check the stationarity of the series; and the ARDL bounds testing approach to cointegration to establish a long run relationship. The findings affirm cointegration among the series. Real devaluation exerts contractionary effect on economic growth. The results from variance decomposition and impulse response-function show unidirectional causality from foreign remittances to economic growth; and bidirectional causality between money supply and foreign remittances. Furthermore, money supply Granger causes government spending; while devaluation Granger causes economic growth, albeit, weakly. The results should help in formulating a comprehensive trade policy including the use of competitive devaluation as a tool to correct balance of payments problems.Devaluation, Contractionary, Cointegration

Neuroimaging of Habit-based vs. Goal-directed behavior in Instrumental Learning

Addiction has been proposed to result from an overreliance on the habit-based and goal-directed controllers of behavior; however, few data exist to simultaneously support both behavioral and neuoranatomical aspects of this theory in humans. Here, we clarify the locations of the homologous structures controlling behavior in the human brain to those studied in animal models. The study included two parts. 1) The first part established in a behavioral experiment that the devaluation video in the present paradigm was able to influence instrumental behavior. Using a 3-session instrumental learning task to examine behavior, we examined 78 participants, aged 18-35. A significant difference in the change in response rate immediately before and after devaluation was found between the 2 groups viewing worms in devaluation compared to the group not viewing worms. There was a significant difference in change in liking immediately before and after devaluation between the three conditions, as well as in the change in liking, hunger, and response rate between the paired and empty bowl unpaired conditions. There was a significant correlation between snack liking pre-session 3 and response rate in session 3, as well as between pre-extinction snack liking and response rate in the start of extinction. 2) The second part of the study used the same 3-session training paradigm over 3-days, with fMRI on the third day to measure neural activity during this same instrumental learning task. Although the results are preliminary (N=10), these show that the comparable regions of the human brain are involved in goal-directed and habit-based control of behavior, with a perfect negative Spearman correlation of mean vmPFC activity at the end of training and the change in responding from immediately before to immediately after devaluation. Three of the 10 subjects were addicted smokers, which is insufficient data to determine whether they were less sensitive to reward devaluation and whether they relied more heavily on brain structures associated with habit-based controllers of behavior. However, understanding the relationship between habit-based and goal-directed controllers of behavior and their role in addiction and clarifying the human brain structures responsible for these systems can lead to the development of therapies for addiction