ON THE EFFECT OF DEVALUATION DURING STABILIZATION PROGRAMS IN LDCS

This paper is a cross-section study of the effect of real devaluations on capacity utilization during stabilization programs in LDCs. It finds that such devaluations had a significant negative effect on output as predicted in many recent papers. This was not because devaluation caused a rise in aggregate saving but more because of a sharp contraction in investment. External factors such as terms of trade and the capacity to import had a significant positive impact while monetary and fiscal policy played only a minor role.