The effects of devaluation on real output: The case of Jamaica, 1975-1985.

In small open economies nominal devaluation is generally the government's policy instrument for dealing with balance of payments problems. There is general agreement that at least among developing economies devaluation is an effective means of improving a country's external balance. The effect of devaluation on the rest of the economy is, however, still a subject of some controversy. Most open economy models and the so-called "orthodox" approach to stabilization policy claim that devaluation ultimately has an expansionary effect on domestic production and incomes as demand shifts from non-tradables to tradables. Both the increase in exports and the substitution of domestic for imported goods stimulate domestic output.