Contractionary Devaluation in Developing Countries: An Analytical Overview

The growing literature on whether devaluation has contractionary effects on output in developing countries is evaluated. The paper explores links between the exchange rate and real output within a unified, fairly general analytical framework that incorporates several of the developing country features cited in the literature. The analysis suggests that many of the arguments on both sides of the debate about contractionary devaluation require modification, that some potential effects have been ignored, and that the direction of the impact effects of devaluation on real output is ambiguous on analytical grounds.