External Devaluations: Are Small States Different?

By Sebastian Acevedo Mejia, Aliona Cebotari, Kevin Greenidge, Geoffrey N. Keim

November 23, 2015

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Sebastian Acevedo Mejia, Aliona Cebotari, Kevin Greenidge, and Geoffrey N. Keim External Devaluations: Are Small States Different?, (USA: International Monetary Fund, 2015) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Consumption, Currencies, Depreciation, Exchange rates, Foreign exchange, Inflation, Money, National accounts, Prices

Keywords: Africa, Consumption, Currencies, Depreciation, Devaluation case, Devaluation effect, Devaluation inflation spike, Devaluation investment, Devaluation outcome, Exchange rates, Expansionary devaluation, External devaluation, Global, Inflation, One-off devaluation event, Small states, U.S. dollar, Western Hemisphere, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/240
Stock No:

WPIEA2015240
ISBN:

9781513512914
ISSN:

1018-5941

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