Premio Anual de Investigación Económica “Dr. Raúl Prebisch”

Short and long-run effects of devaluations. Evidence from Argentina (1854-2017)

Luciano Campos

2018-12-20 - Traditionally, devaluations are considered to improve the trade balance, expand output and have no long-run real effects. Alternatively, some observers in developing countries found that devaluations were contractionary on impact, while others argued that they might foster growth if the real exchange rate remained devalued long enough. Using Argentina as our case study, which is convenient due to its long series availability and its subsequent switches in exchange rate regimes, we identify four structural shocks in line with the traditional and alternative views. In particular, a Bayesian Structural Vector Autoregressive analysis where sign and exclusión restrictions are imposed on impact, allows us to decompose the effects of expansionary and contractionary devaluations, whereas nominal and real shocks are identied by imposing long-run restrictions. We find that: (i) devaluations were mostly of the contractionary type; (ii) expansionary devaluations, as predicted in the traditional theory, cannot be recovered from the DGP; (iii) real effects tend to predominate under low or moderate ination and (iv) nominal shocks under high inflationary periods. Finally, we do a historical revision of Argentinian devaluation episodes since 1854 until 2017 in light of our estimates.