ALTERNATIVE STRATEGIES FOR REAL DEVALUATION AND THE SEQUENCING OF ECONOMIC-REFORMS IN DEVELOPING-COUNTRIES

The two basic strategies for real exchange rate devaluation - monetary contraction and nominal devaluation - are compared with respect to their efficiency. Monetary contraction has important merits but may suffer more from internal and external financial constraints. The efficiency of real devaluation is diminished by an immediate relaxation of exchange controls but improved by trade and domestic capital market liberalization. For financially repressed economies, monetary contraction is superior because it provides the conditions for both a successful real devaluation and a first step towards capital market liberalization, namely a reduction in inflation rates.