The Effects of Devaluation on the Trade Balance and the Balance of Payments: Some New Results

Abstract

This paper examines the statistical relationship between devaluation and both the trade balance and the balance of payments for 16 devaluations of 14 countries in the 1960s. Using several tests involving both the seemingly unrelated and pooled cross-section time-series regression techniques, the paper tests the effect of devaluation while standardizing for other variables that may affect the foreign accounts. While the balance of payments does seem to improve following devaluation, no evidence is found to support the hypothesis that devaluation improves the trade balance. The paper concludes that the adjustment to devaluation is essentially monetary in nature, involving only a portfolio stock adjustment.