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Competitive devaluations : a welfare-based approach

Author: Giancarlo Corsetti; National Bureau of Economic Research.
Publisher: Cambridge, MA. : National Bureau of Economic Research, ©1999.
Series: Working paper series (National Bureau of Economic Research), working paper no. 6889.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Abstract: This paper studies the mechanism of international transmission of exchange rate shocks within a 3-country Center-Periphery model, providing a choice-theoretic framework for the policy analysis and empirical assessment of competitive devaluations. If relative prices and terms of trade exhibit some flexibility conforming to the law of one price, a devaluation by one country is beggar-thy-neighbor relative to  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Giancarlo Corsetti; National Bureau of Economic Research.
OCLC Number: 70108131
Notes: "January 1999."
Also available via the Internet at http://www.nber.org/wwp.html.
Description: 1 online resource (34 pages).
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 6889.
Responsibility: Giancarlo Corsetti [and others].

Abstract:

Abstract: This paper studies the mechanism of international transmission of exchange rate shocks within a 3-country Center-Periphery model, providing a choice-theoretic framework for the policy analysis and empirical assessment of competitive devaluations. If relative prices and terms of trade exhibit some flexibility conforming to the law of one price, a devaluation by one country is beggar-thy-neighbor relative to another country through its effects on cost-competitiveness in a third market. Yet, due to direct bilateral trade among the two countries, there is a large range of parameter values for which a country is better off by maintaining a peg in response to its partner's devaluation. If instead deviations from the law of one price are to be considered the dominant empirical paradigm, then the beggar-thy-neighbor effect based on competition in a third market may disappear. However, a country's devaluation has a negative welfare impact on the economies of its trading partners based on the deterioration of their export revenues and profits and the increase in disutility from higher labor effort for any level of consumption.

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