Disciplines
Finance and Financial Management
Abstract
Devaluation has been viewed as being quite different from monetary policy (Caves, Cooper, Ethier, Frankel, Frenkel, Harberger, Johnson, Jones, Kenen, McCallum, Mussa, Salvatore, Tsiang) or even just the opposite of it in terms of its effects on real variables (Berglas, Dornbusch, Mundell). This paper yields to the temptation that Allen and Kenen set out: to follow one’s intuition and come to the clear conclusion that these two policy initiatives are very similar. It does this by specifying the conditions under which the two are identical in the small-country setting with a general degree of management of the exchange rate. The key requirement is that the markets for the enactment of these two policies be the same in the two cases; or be effectively the same, as perfect capital mobility guarantees in one of the specific examples that Allen and Kenen treat. The reason that Berglas, Dornbusch, and Mundell come to their extraordinary conclusion is that in their models money is the only financial instrument that is available to be held by domestic residents. The exchange rate on their view is being pegged in the money-goods market, rather than the way it is conventionally done in modern industrialized economies, in the money-capital market. It should not be surprising that their results do not conform with intuition.
Recommended Citation
Boyer, Russell S., "ON THE OBSERVATIONAL EQUIVALENCE OF DEVALUATION AND MONETARY POLICY" (2005). CRIF Seminar series. 17.
https://research.library.fordham.edu/crif_seminar_series/17
