Understanding Devaluations in Latin America: A 'Bad Fundamentals' Approach

This paper is an empirical study of the determinants of Latin American devaluations during the period between 1957 and 1988. The estimation of probabilities of devaluation is done using logit analysis. The empirical results show that reserves, the real exchange rate, the share of domestic credit to the public sector and the current account deficit have a significant effect on the likelihood of a devaluation. In summary, this paper confirms the view that devaluations in Latin America are a consequence of the state of fundamentals in these economies.