External Devaluations: Are Small States Different?

39 Pages Posted: 3 Feb 2016

See all articles by Sebastian Acevedo Mejia

Sebastian Acevedo Mejia

International Monetary Fund (IMF)

Aliona Cebotari

International Monetary Fund (IMF)

Kevin Greenidge

International Monetary Fund (IMF)

Geoffrey N. Keim

University of Pennsylvania

Date Written: November 2015

Abstract

The paper investigates whether the macroeconomic effects of external devaluations have systematically different effects in small states, which are typically more open and less diversified than larger peers. Through several analytical approaches -- DSGE model, event study, and regression analysis -- it finds that the effects of devaluation on growth and external balances are not significantly different between small and large states, with both groups equally likely to experience expansionary or contractionary outcomes. However, the transmission channels are different: devaluations in small states are more likely to affect demand through expenditure compression, rather than expenditure-switching channels. In particular, consumption tends to fall more sharply in small states due to adverse income effects, thereby reducing import demand. Policy conclusions point to the importance of social safety nets, complementary wage and antiinflation policies, investment-boosting reforms, and attention to potential adverse balance sheet effects to ensure positive outcomes.

Keywords: external devaluation, devaluations, exchange rate, devaluation, currency, consumption, Studies of Particular Policy Episodes, Economic Growth of Open Economies, All Countries,

JEL Classification: F43, E65, F31

Suggested Citation

Acevedo Mejia, Sebastian and Cebotari, Aliona and Greenidge, Kevin and Keim, Geoffrey N., External Devaluations: Are Small States Different? (November 2015). IMF Working Paper No. 15/240, Available at SSRN: https://ssrn.com/abstract=2727185

Sebastian Acevedo Mejia (Contact Author)

International Monetary Fund (IMF) ( email )

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

Aliona Cebotari

International Monetary Fund (IMF) ( email )

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

Kevin Greenidge

International Monetary Fund (IMF) ( email )

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

Geoffrey N. Keim

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

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