Summary of WP/93/82: “Devaluation and Competitiveness in a Small Open Economy: Ireland 1987-1993”

This compilation of summaries of Working Papers released during July-December 1993 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street N.W., Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201

Abstract

This compilation of summaries of Working Papers released during July-December 1993 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street N.W., Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201

This paper studies market expectations of a devaluation of the Irish pound from 1987 to 1993 and relates them to the evolution of Ireland’s competitiveness over the same period. 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 the same period is also found to be strongly linked to sterling’s fluctuations, 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. The devaluation of the Irish pound in January 1993 is estimated to exceed investors’ realignment expectations at that time as well as the loss of Irish competitiveness since the beginning of the exchange rate mechanism (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.

Working Paper Summaries (WP/93/55 - WP/93/95)
Author: International Monetary Fund