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NBER WORKING PAPER SERIES

DEVALUATION CRISES AND THE MACROECONOMIC CONSEQUENCES
OF POSTPONED ADJUSTMENT IN DEVELOPING COUNTRIES

Sebastian Edwards
Peter Montiel

Working Paper No

66

NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
February 1989

A

first version of this paper was written while Edwards was a visiting scholar in the Research Department of the International Monetary Fund. We have benefited from discussions with Saul Lizondo. We are particularly
This paper is part of grateful to Mohsin Ehan for very helpful comments.
NBER's research program in International Studies. Any opinions expressed are those of the authors not those of the National Bureau of Economic Research.

NBER Working Paper #2866
February 1989

DEVALUATION CRISES AND THE MACROECONOMIC CONSEQUENCES
OF POSTPONED ADJUSTMENT IN DEVELOPING COUNTRIES

ABSTRACT

This paper develops our analytical model to explore the relationship between the dynamics of macroeconomic adjustment and the timing of the implementation of an adjustment program featuring an official devaluation.
The effects of postponing adjustment depend on the source of the original shock, In the case of fiscal expansion, postponement implies a larger

eventual official devaluation and greater deviations of macroeconomic variables from their steady-state values. shocks, For adverse terms of trade

postponement does not affect the size of the eventual official

devaluation, but does magnify the amount of post-devaluation overshooting by key macroeconomic variables.

Sebastian Edwards
Department of Economics
University of California
Los Angeles, CA 90024

Peter Montiel
Research Department
International Monetary Fund
Washington, DC 20431

I.

Introduction

An important issue in the design of stabilization programs refers to
the

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