Devaluation and Competitiveness in a Small Open Economy: Ireland 1987-1993

November 1, 1993

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Format: Chicago

Leonardo Bartolini. Devaluation and Competitiveness in a Small Open Economy: Ireland 1987-1993, (USA: International Monetary Fund, 1993) accessed December 26, 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

This paper studies market expectations of a devaluation of the Irish pound from 1987 to 1993 and relates them to the evolution of Ireland’s competitiveness over the same period. Changes in expectations of the currency’s devaluation can be explained largely by developments outside Ireland, particularly by past and anticipated movements of sterling. The evolution of Ireland’s real exchange rate over the same period is also found to be strongly linked to sterling’s fluctuations, even after adjusting for sterling-insensitive trade between Ireland and the United Kingdom, and despite the significant progress toward trade diversification recorded by Ireland during the 1980s. The devaluation of the Irish pound in January 1993 is estimated to exceed investors’ realignment expectations at that time as well as the loss of Irish competitiveness since the beginning of the ERM crisis in the summer of 1992. This “excess devaluation” helps explain subsequent large capital inflows and the Irish pound’s smooth transition to the wide ERM band in August 1993.

Subject: Competition, Currencies, Exchange rates, Financial markets, Foreign exchange, Money, Real effective exchange rates, Real exchange rates

Keywords: British pound, Competition, Competitiveness weight, Currencies, Deutsche mark, Devaluation rate, Devaluation series, Exchange rate, Exchange rates, Expectations Irish pound devaluation, Interest rate, Open economy, Real effective exchange rates, Real exchange rates, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1993/082
Stock No:

WPIEA0821993
ISBN:

9781451954678
ISSN:

1018-5941

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