Competitive Devaluations: A Welfare-Based Approach
36 Pages Posted: 26 Aug 1999
There are 2 versions of this paper
Competitive Devaluations: A Welfare-Based Approach
Competitive Devaluations: a Welfare-Based Approach
Date Written: December 1998
Abstract
This paper studies the mechanism of international transmission of exchange rate shocks within a three-country Center-Periphery model, providing a choice-theoretic framework for the policy analysis and empirical assessment of competitive devaluations. If relative prices and terms of trade exhibit some flexibility conforming to the law of one price, a devaluation by one country is beggar-thy-neighbor relative to another country through its effects on cost-competitiveness in a third market. Yet, due to direct bilateral trade among the two countries, there is a large range of parameter values for which a country is better off by maintaining a peg in response to its partner's devaluation. If instead deviations from the law of one price are to be considered the dominant empirical paradigm, then the beggar-thy-neighbor effect based on competition in a third market may disappear. However, a country's devaluation has a negative welfare impact on the economies of its trading partners based on the deterioration of their export revenues and profits and the increase in disutility from higher labor effort for any level of consumption.
Keywords: competitive devaluations, exchange rate shocks, contagion, global trade links, law of one price
JEL Classification: F31, F32, F41, F42
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Maurice Obstfeld and Alan C. Stockman
-
By Maurice Obstfeld and Kenneth Rogoff
-
Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?
By Varadarajan V. Chari, Patrick J. Kehoe, ...
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
New Directions for Stochastic Open Economy Models
By Maurice Obstfeld and Kenneth Rogoff
-
Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility