The mechanics of devaluations and the output response in a DSGE model
Subtitle: how relevant is the balance sheet effect?
By: by Camilo E Tovar
Contributors: Bank for International Settlements. Monetary and Economic Department
Series: BIS working papers -- no. 192; BIS working papers (Online) -- no. 192.
Publisher: Bank for International Settlements
Published: 2005
Place of publication: Basel, Switzerland
Language: eng
Format: [electronic resource] :
Description: "The relative importance of different mechanisms through which devaluations affect output are analyzed using a dynamic stochastic general equilibrium model for a small open economy with imperfect competition and nominal rigidities. Devaluations are defined as an increase in the central bank's nominal exchange rate target, which induces a decrease in the nominal interest rate. Three main mechanisms through which devaluations affect output are considered: The traditional expansionary expenditure-switching effect, the balance sheet effect which allows the possibility of contractionary effects when firms' debt are dollar-denominated, and a monetary channel associated with an interest rule that targets the nominal exchange rate. The model is calibrated and simulated under alternative scenarios of exchange rate regimes and shocks. Devaluations are found to be expansionary despite the contractionary balance sheet effect. In response to adverse external shocks the economy's output response improves with a devaluation the less flexible the exchange rate regime is."
Notes: Title from PDF file (viewed on Jan. 4, 2006).

"Monetary and Economic Department."

"November 2005."

Includes bibliographical references.

Also available in print.

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Mode of access: World Wide Web.