FEEM working papers "Note di lavoro" series
2002 .017

Devaluation (Levels versus Rates) and Balance of Payments in a Cash-in-Advance Economy


Authors: Alberto Petrucci
Series: Economy and Society
Editor: Gianmarco I.P. Ottaviano
Type: Journal
Keywords: Devaluation,balance of payments,cash-in-advance constraint,overlapping generations
JEL n.: E21,E62
JEL: Journal of International Money and Finance
Pages: N.3
Date: 2003

Abstract

This paper investigates the consequences of the currency devaluation, both in levels and rates, on the balance of payments in a cash-in-advance economy with finite horizons, endogenous capital accumulation and international capital immobility. In this context, a once and for all currency devaluation induces a balance of payments surplus, whereas a sustained increase in the rate of devaluation produces, in principle, an ambiguous effect on the balance of payments. If however non-restrictive assumptions on some structural parameters are made, an increase in the devaluation rate leads to a balance of payments surplus, the exact opposite of Calvo's result (1981).
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