Dynamic effects of a devaluation in a monetary approach model
A broad literature exists on the problem of devaluations in Monetary Approach models. So far the analyses have largely been confined to comparative static effects in models with exogenously fixed real income. The major results are the long-run neutrality of a devaluation and a stable, monotonic path of convergence towards the long-run equilibrium. The literature suggests, that these results are robust against relaxations of the assumptions. This paper investigates the validity of those claims. It systematically varies the assumptions of the standard Monetary Approach model and explores the dynamic properties of the resulting variations. Its main focus are the consequences of an endogenous determination of real income and of hysteresis in trade. The analysis shows that neither the monotonicity nor the stability properties carry over to models with even moderately relaxed assumptions. The precise paths of adjustment are shown to be highly sensitive with respect to the precise formulation of the model.