The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper evaluates the growing literature on whether devaluation has contractionary effects on output in developing countries. It explores the nature of the links between the exchange rate and real output within a unified, fairly general analytical framework which incorporates a number of the developing-country features cited in this literature. The analysis suggests that many of the arguments on both sides of the contractionary devaluation debate require modification and that a number of potential effects have been ignored. It is concluded that the direction of the impact effects of devaluation on real output is ambiguous on analytical grounds. MASTER FILES ROOM C-130 001