Devaluation Devaluation in Low-Inflation Economies

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Devaluation Devaluation in Low-Inflation Economies

Kiguel & Nita Ghei, 1993.

We live in a period characterized by devaluation pessimism. As the world became more tolerant of inflation, following the collapse of the Bretton Woods era, inflation rates have been higher, and maxi-devaluations have been more frequently eroded by increases in domestic prices. Devaluations are now seen more often as an instrument to accommodate inflation instead of one that can be effective in changing the real exchange rate and support external balance. Recent empirical work on this topic by Kamin (1988) and Edwards (1989) by and large support this view. But is this skepticism about devaluations right? Has it always been this way?