Short-term interest rates are higher than in the control group over the eight quarters leading up to devaluation, as if a positive probability were attached to the change in the exchange rate. As the event gets closer and probabilities of devaluation are refined, the interest rate rises significantly in anticipation of the devaluation. Stock prices are significantly lower in the period leading up to devaluation, presumably reflecting these higher interest rates. Interest rates do not decline substantially after the actual devaluation. This suggests that devaluation has credibility costs and that markets expect further subsequent attacks, requiring the monetary authorities to maintain high interest rates after the devaluation.
Unemployment is also higher than average in the years surrounding devaluations.
Only output growth does not differ significantly around devaluations compared to periods of tranquillity. Overall, these patterns are consistent with standard economic models of the causes and effects of devaluation. These external imbalances are associated with unusually expansionary monetary and fiscal policies. Governments appear to react well to devaluations, tightening monetary and fiscal policies in order to lock in competitiveness gains. Devaluations are preceded by expansionary monetary and fiscal policies, which economists also think of as causes of devaluations.