Book Summary — International Economics

Economic Adjustment and Exchange Rates in Developing Countries

Edited by Sebastian Edwards and Liaquat Ahamed

Publisher University of Chicago Press for the NBER Published January 1986 ISBN 0-226-18469-2

Overview

This volume collects eleven papers from a joint National Bureau of Economic Research–World Bank conference held in Washington, D.C., from November 29 to December 1, 1984 — convened in the shadow of the early-1980s debt crisis, when currency misalignment and failed stabilization attempts across Latin America, Africa, and the Mediterranean had made exchange rate policy the central battleground of development economics.

Edwards and Ahamed frame the volume around a single question: what determines the "correct" exchange rate for a developing economy, and how should that rate be managed as the economy stabilizes, liberalizes, or absorbs external shocks? The contributors — a roster that includes Rudiger Dornbusch, Michael Mussa, Guillermo Calvo, Maurice Obstfeld, and Arnold Harberger — approach that question from both ends: general theoretical models of the real exchange rate, and close case studies of specific devaluations and currency regimes.

Core Themes

Contents

Eleven papers, arranged from general theory to country-specific case studies.
Chapter Pages
— Introduction — Sebastian Edwards & Liaquat Ahamed 1–16
1 Exchange Rate Management and Stabilization Policies in Developing Countries — Sweder van Wijnbergen 17–42
2 The Effects of Commercial, Fiscal, Monetary, and Exchange Rate Policies on the Real Exchange Rate — Michael L. Mussa 43–88
3 Wage Indexation, Supply Shocks, and Monetary Policy in a Small, Open Economy — Joshua Aizenman & Jacob A. Frenkel 89–142
4 Multiple Exchange Rates for Commercial Transactions — Rudiger Dornbusch 143–174
5 Welfare, Banks, and Capital Mobility in Steady State — Guillermo A. Calvo 175–200
6 Capital Flows, the Current Account, and the Real Exchange Rate — Maurice Obstfeld 201–232
7 Commodity Export Prices and the Real Exchange Rate in Developing Countries: Coffee in Colombia — Sebastian Edwards 233–266
8 Stabilization, Stagflation, and Investment Incentives: The Case of Kenya, 1979–1980 — William H. Branson 267–294
9 Discrete Devaluation as a Signal to Price Setters: Suggested Evidence from Greece — Louka T. Katseli 295–332
10 Collective Pegging to a Single Currency: The West African Monetary Union — Jorge Braga de Macedo 333–368
11 Economic Adjustment and the Real Exchange Rate — Arnold C. Harberger 369–424

Why It Mattered

Published as the debt crisis pushed dozens of developing countries into IMF-backed adjustment programs, the volume became a reference point for the era's central policy dispute: whether devaluation-led stabilization could restore competitiveness without triggering the wage-price spirals and stagflation seen in Kenya and Greece, and whether collective arrangements like the West African Monetary Union offered a credible alternative to unilateral currency management. Its theoretical chapters — particularly Mussa's and Obstfeld's treatments of the real exchange rate — remained standard references in open-economy macroeconomics well beyond the 1980s debt crisis that prompted the conference.

Citation

Edwards, Sebastian, and Liaquat Ahamed, eds. Economic Adjustment and Exchange Rates in Developing Countries. Chicago: University of Chicago Press for the National Bureau of Economic Research, 1986.