Description

The paper investigates whether the macroeconomic effects of external devaluations have
 systematically different effects in small states, which are typically more open and less diversified
 than larger peers. Through several analytical approaches -- DSGE model, event study, and
 regression analysis -- it finds that the effects of devaluation on growth and external balances are
 not significantly different between small and large states, with both groups equally likely to
 experience expansionary or contractionary outcomes. However, the transmission channels are
 different: devaluations in small states are more likely to affect demand through expenditure
 compression, rather than expenditure-switching channels. In particular, consumption tends to fall
 more sharply in small states due to adverse income effects, thereby reducing import demand.
 Policy conclusions point to the importance of social safety nets, complementary wage and antiinflation
 policies, investment-boosting reforms, and attention to potential adverse balance sheet
 effects to ensure positive outcomes.

More publications in this series: Working Papers

More publications by: Sebastian Acevedo Mejia ; Aliona Cebotari ; Kevin Greenidge ; Geoffrey N. Keim