Devaluation (Levels versus Rates) and Balance of Payments in a Cash-in-Advance Economy

Petrucci Alberto
CEIS Research Paper
This paper investigates the consequences of the currency devaluation, both in levels and rates, on the balance of payments in a cash-in-advance economy with finite horizons, endogenous capital accumulation and international capital immobility. In this context, a once and for all currency devaluation induces a balance of payments surplus, whereas a sustained increase in the rate of devaluation produces, in principle, an ambiguous effect on the balance of payments. If however non-restrictive assumptions on some structural parameters are made, an increase in the devaluation rate leads to a balance of payments surplus, the exact opposite of Calvo's result (1981).
Number: 14
Keywords: Devaluation, balance of payments, cash-in-advance constraint, overlapping generations
JEL codes: E21, E62
Date: Thursday 08 May 2003
Revision Date: Thursday 08 May 2003