Author

Zahid Ali

Date of Award

8-1991

Degree Type

Thesis

Degree Name

Doctor of Philosophy (PhD)

Department

Economics / Economic Policy

Supervisor

W.M. Scarth

Co-Supervisor

F.T. Denton

Committee Member

A.L. Robb

Abstract

Are devaluations contractionary? Do devaluations ensure improvement in the balance of payments? These questions have attracted much attention in recent years, since during that time, macro-economists have developed models involving intermediate imports. In such a framework, the exchange rate has both expansionary demand-side and contractionary supply-side effects. A number of studies, both theoretical and empirical, have explored the relative size of the competing effects that follow from devaluations. However, most of the studies involve very limited or specialized models. For example, most studies deal with a specific form of the production function, and dynamic analysis of exchange rate devaluation is almost always absent. As a result, very few studies shed any light on the relationship between stability of the model and the likelihood of contractionary devaluation. Furthermore, except for one, none of the studies has examined devaluation's effects under different tax system. In this thesis, we extend those models which have imposed the bare minimum of restrictions on the production relationship, and which pay explicit attention to dynamics. The whole thesis can be viewed as two main essays. In the first main essay (Chapters 3 and 4) we focus on the likelihood of contractionary devaluation in a model with a general production function involving imported inputs. In this essay the inconsistencies in Buffie (International Economic Review 1986) are corrected. Furthermore, some sensitivity tests are also performed in this essay. These stem from the alternative specifications of wage flexibility, inflationary expectations, the definition of the money demand function, and alternative degrees of capital mobility. In the second main essay (Chapter 5) a sensitivity analysis of an improved version of the Lai and Chang model (Journal of Macroeconomics 1989) is presented. In this essay we have investigated how the supply-side effects of taxes and exchange rates interact (when the tax system is not fully indexed) to complicate the effects of devaluation. (Abstract shortened by UMI.)


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