External Devaluations : Are Small States Different?

Author/Editor:

Sebastian Acevedo Mejia ; Aliona Cebotari ; Kevin Greenidge ; Geoffrey N. Keim

Publication Date:

November 23, 2015

Electronic Access:

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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:

The paper investigates whether the macroeconomic effects of external devaluations have systematically different effects in small states, which are typically more open and less diversified than larger peers. Through several analytical approaches -- DSGE model, event study, and regression analysis -- it finds that the effects of devaluation on growth and external balances are not significantly different between small and large states, with both groups equally likely to experience expansionary or contractionary outcomes. However, the transmission channels are different: devaluations in small states are more likely to affect demand through expenditure compression, rather than expenditure-switching channels. In particular, consumption tends to fall more sharply in small states due to adverse income effects, thereby reducing import demand. Policy conclusions point to the importance of social safety nets, complementary wage and antiinflation policies, investment-boosting reforms, and attention to potential adverse balance sheet effects to ensure positive outcomes.

Series:

Working Paper No. 15/240

Subject:

English

Publication Date:

November 23, 2015

ISBN/ISSN:

9781513512914/1018-5941

Stock No:

WPIEA2015240

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

38

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