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Journal of Economic Integration 2006 September;21(3) :526-550.
DOI: https://doi.org/10.11130/jei.2006.21.3.526
Why Are Crisis-Induced Devaluations Contractionary? Exploring Alternative Hypotheses
Ramkishen S. Rajan and 
Chung-Hua Shen 
George Mason University
National Chengchi University
Copyright ©2006 Journal of Economic Integration
ABSTRACT

Why are some currency crises followed by economic contractions while others are not? This paper is an attempt at answering this query. In particular, we investigate two closely related questions. First, we explore whether there is a difference in the output effects of a devaluation during “normal” periods versus crises ones; after all, during non-crisis periods, real exchange devaluation is seen as an important policy option for promoting exports and output growth. Yet, the literature has not made a distinction between crisis and non-crisis periods. To preview the main conclusion, we find that the contractionary effects tend to exist only during the crisis period. Building on this, we go on to explore the factors that cause a crisis-induced devaluation to be contractionary.

JEL Classifications: F34, F41, F42

Keywords: Capital flows | Currency crisis | Contractionary devaluation | Speculative attack
 
REFERENCE
1. Agenor, P. (1991). “Output, Devaluation, and the Real Exchange Rate in Developing Countries”, Weltwirtschaftliches Archiv, 127, pp.18-41.
2. Agenor, P., J. Aizenman and A. Hoffmaister (2000). “The Credit Crunch in East Asia: What Can Bank Excess Liquid Assets Tell Us?”, Working Paper No.7951, NBER.
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