the period 1990-2010, ending in the third quarter of 2010. The resulting data set covers 60 countries or episodes of large devaluations. An episode of large devaluation was defined as the largest quarter-onquarter devaluation of each country’s REER. These data come from the IMF’s information notice system (INS). The value of exports of goods and services and the FDI series come from the IMF’s database on International Financial and Trade Statistics.

# **IV. Stylized Facts**

As a first approach to the data, Figures 1 and 2 present the cross-country averages of the REER, FDI and exports variables, normalized so that they equal zero in the quarter of the large devaluation and the units are in country-specific standard deviations. That is, we subtracted the value of each variable in the relevant quarter and divided the resulting series by each country’s standard deviation of each variable. This normalization facilitates the interpretation of these graphs.

Figure 1 illustrates that the identification of large devaluations resulted in a discrete change in the level of the REER before and after the identified maximum devaluations. It is noteworthy that on average during the two-year (eight quarters) after each episode the level of the REER was significantly lower than during the preceding two years. That is, the approach yields a significant and persistent devaluation treatment, which hopefully includes devaluations caused by different reasons across the country episodes rather than just reflecting episodes of devaluations driven by financial crises, just the type of unsystematically assigned event suitable for further data analysis. Alternative approaches used in the literature described earlier include the use of proxies for undervaluation or simply examine the effects of exchange-rate variations on other outcome variables. Both would be problematic for an event-study approach.<sup>8</sup> Figure 2 presents time-period averages of the normalized FDI and exports variables before and after the devaluation episodes, based on data from sub-samples of countries with data for all periods before and after the devaluation, and the list of countries for each sub sample appears in the table in the Appendix.<sup>9</sup> Tables from 1990-2007, the correlation between the two series is 0.73. Putting the frequency of the data aside, the Penn World Table variable could be more desirable for future work, because the REER depends solely on prices of consumer goods (in each country’s basket of goods used to calculate CPI indexes), whereas in principle the PWT index includes consumer goods as well as investment goods and inputs purchased by governments. On the other hand, not all countries in the PWT database conduct price surveys, and the PWT includes observations derived from imputing techniques.

8 In addition, the estimation of exchange-rate misalignment is itself a complex undertaking, replete with potential pitfalls, because it requires a well specified model of equilibrium exchange rates. For details, see, for example, Levy-Yeyati and Sturzenegger (2007), Rodrik (2008), among others. Our sample of episodes includes crises that could be driven by sudden stops of capital inflows, such as Mexico’s crisis of 1995 and East Asian devaluations during the late 1990s, as well as more recent and less sharp devaluations of high-income country currencies during 2009-2010. Consequently the magnitude of the devaluations vary greatly across countries, but what matters for the FDI fire sale effect is that the devaluations are large relative to the behavior of each country’s REER over the longer time horizon of 1990-2010. See section

> 9 Since the date of each episode varies across countries, and some occurred towards the beginning of the sample period or the end, the sample used to calculate these averages changes over the 16 quarters portrayed in the graph. In addition, the coverage of the data for each indicator varies across countries. The series averages with the whole sample paint a different picture. Exports tend to fall immediately prior to the devaluation, bouncing back after the first quarter after the devaluations, and rising steadily thereafter. The FDI series in this sample fall sharply one quarter prior to the devaluation, with a small bounce back that coincides with the quarter of the devaluations,

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