Contractionary Devaluation, and Dynamic Adjustment of Exports and Wages

39 Pages Posted: 7 Apr 2004 Last revised: 7 Sep 2022

See all articles by Felipe Larrain

Felipe Larrain

Pontificia Universidad Catolica de Chile

Jeffrey D. Sachs

Columbia University - Columbia Earth Institute; National Bureau of Economic Research (NBER)

Date Written: November 1986

Abstract

Recent macroeconomic models of developing countries have emphasized the possibility of contactionary devaluations, stressing that domestic aggregate demand is likely to be reduced by the devaluations while aggregate supply may respond only slowly to the change in relative prices brought about by the devaluation. These results have been obtained in static models. In this paper we add wage and export-sector dynamics to the models of contractionary devaluation, and show that the effects which produce contractionary devaluations in the short term can produce limit cycles in the long run. The economy never returns to long-run equilibrium following a devaluation, but rather moves with fixed periodicity through successive phases of boom and bust.

Suggested Citation

Larrain, Felipe and Sachs, Jeffrey D., Contractionary Devaluation, and Dynamic Adjustment of Exports and Wages (November 1986). NBER Working Paper No. w2078, Available at SSRN: https://ssrn.com/abstract=344855

Felipe Larrain

Pontificia Universidad Catolica de Chile ( email )

Av. Vicuna Mackenna 4860
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Santiago
Chile
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56 2 553-2377 (Fax)

Jeffrey D. Sachs (Contact Author)

Columbia University - Columbia Earth Institute ( email )

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National Bureau of Economic Research (NBER)

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