Devaluation (Levels versus Rates) and Balance of Payments in a Cash-in-Advance Economy
Devaluation,balance of payments,cash-in-advance constraint,overlapping generations
Economy and Society
Gianmarco I.P. Ottaviano
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).