Devaluations, Output and the Balance Sheet Effect: A Structural Econometric Analysis

44 Pages Posted: 20 Sep 2007

Date Written: September 2006

Abstract

This paper estimates a new open economy macroeconomic model for South Korea to determine the output effect of currency devaluations. Three transmission mechanisms are considered: the expenditure-switching, the balance sheet, and a monetary channel associated to a nominal exchange rate target. Devaluations are defined as an increase in this target. This allows to isolate the effects of an explicit exogenous devaluationary policy shock. Ceteris paribus, a devaluation is found to be expansionary. Output contractions in South Korea should then be associated with a different shock such as an adverse shock on the international interest rate or on export demand.

Keywords: Devaluations, balance sheet effect, financial accelerator, interest rate rule, exchange rate target, new open economy macroeconomics, structural estimation, DSGE

JEL Classification: F31, F41

Suggested Citation

Tovar, Camilo E., Devaluations, Output and the Balance Sheet Effect: A Structural Econometric Analysis (September 2006). BIS Working Paper No. 215, Available at SSRN: https://ssrn.com/abstract=948209 or http://dx.doi.org/10.2139/ssrn.948209

Camilo E. Tovar (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://blog-imfdirect.imf.org/bloggers/camilo-e-tovar/

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