Paul Krugman on contractionary devaluation

This is from the 1970s, and with Lance Taylor:

The presumption that devaluation is expansionary is not supported by firm empirical evidence. Why, then, is it so widely accepted? Leftists have been known to suggest class bias — as we will argue later, devaluation does typically redistribute income from wages to profits — but this is too glib. We believe, instead, that the orthodox view of devaluation derives much of its strength from the persuasive power of the simple, elegant models in which it is presented. Since skeptics have mostly relied on Journalism or at best partial equilibrium analysis, it is not surprising that theoretical discussion is dominated by the belief that devaluation has an expansionary effect.

As just hinted, neglecting the contractionary impacts of devaluation amounts to ignoring income effects, especially those transferring real purchasing power toward economic actors with high marginal propensities to save. By redirecting income to high savers, devaluation can create an excess of saving over planned investment ex_ ante , and reductions in real output and imports ex_ post .

…Casual empiricism suggests that all three circumstances prevail in many countries, especially the less developed ones. In these
countries a deflationary impact from devaluation is more than a remote possibility; it is close to a presumption. The purpose of this paper is to show in a formal model how devaluation can cause an economic contraction. The results will come as no surprise to those concerned with policy in the underdeveloped world.

There is nothing wrong with changing your mind, as indeed I have myself on numerous issues.  The point is that most macro questions are not cut and dried, and opposing viewpoints are rarely stupid.  I also note a general tendency that, when critics attack other people, they are often attacking views they once held themselves.  I leave it to Adam Phillips and Darian Leader to tell us what that means.

The document you will find here.  For the pointer I thank Jay S.


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