Devaluation and Competitiveness in a Small Open Economy: Ireland 1987-1993

IMF Working Papers, November 1, 1993

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Devaluation and Competitiveness in a Small Open Economy: Ireland 1987-1993

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Bibliographic details

• Authors: Leonardo Bartolini
• Published: November 1, 1993
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451954678.001

Study focus and scope

• Examines market expectations of a devaluation of the Irish pound from 1987 to 1993 and relates those expectations to the evolution of Ireland’s competitiveness over the same period.
• Investigates the determinants of expectation changes and the links between nominal/real exchange rate movements and external developments.

Key findings on expectations and external influences

• Changes in expectations of the currency’s devaluation can be explained largely by developments outside Ireland, particularly by past and anticipated movements of sterling.
• The evolution of Ireland’s real exchange rate over 1987–1993 is strongly linked to sterling’s fluctuations.
• The linkage to sterling remains strong even after:
  • adjusting for sterling-insensitive trade between Ireland and the United Kingdom, and
  • despite the significant progress toward trade diversification recorded by Ireland during the 1980s.

Findings on the January 1993 devaluation and its effects

• The devaluation of the Irish pound in January 1993 is estimated to exceed:
  • investors’ realignment expectations at that time, and
  • the loss of Irish competitiveness since the beginning of the ERM crisis in the summer of 1992.
• This “excess devaluation” helps explain:
  • subsequent large capital inflows, and
  • the Irish pound’s smooth transition to the wide ERM band in August 1993.

Subject areas and keywords

• Subject: Competition, Currencies, Exchange rates, Financial markets, Foreign exchange, Money, Real effective exchange rates, Real exchange rates
• Keywords: British pound, Competition, competitiveness weight, Currencies, deutsche mark, devaluation rate, devaluation series, exchange rate, Exchange rates, expectations Irish pound devaluation, interest rate, open economy, Real effective exchange rates, Real exchange rates, WP