“Output Effects of Devaluations” by Ling Huang
University of California at Berkeley
This paper analyzes the determinants of the output effects of devaluations using a sample of 134 devaluations in developing countries from 1965 to 1999. On the whole, devaluations have not become more contractionary over time, but contractionary episodes in recent years seem to have generated more output losses than in earlier time. Contractionary episodes are characterized by worse fundamentals prior to the devaluation than expansionary episodes, and are associated with subsequent sharp reversals of capital inflows and declines in investment activity. The policy implication is that prudent economic policies are important for mitigating the adverse output effects of devaluations. Proper management of capital flows, especially short-term ones, is critical to avoid a fundamental disequilibrium fueled by their inflows and the devastating effects caused by their reversals.