Do nominal devaluations lead to real devaluations? Evidence from 89 countries

Studies that have concentrated on the relationship between nominal and real exchange rates to determine whether nominal devaluation leads to real devaluation have concluded that this only happens in the short to medium run. This is based on a small number of countries, however. In this paper we engage in the most comprehensive empirical analysis in the literature by using monthly effective exchange rate data from 89 countries. Our bounds-testing approach reveals that nominal devaluations lead to real devaluations in all countries in the short-run. However, we find long-run effects only in a limited number of countries. (C) 2007 Elsevier Inc. All rights reserved.