Do Devaluations Improve the Trade Balance? The Evidence Revisited

This paper reexamines the effectiveness of devaluation in trade balance adjustment. The question is addressed in a framework which improves the previous empirical literature in several respects. The evidence indicates that devaluations have been a successful tool in inducing trade balance adjustment. In particular, nominal devaluations are found to result in significant real devaluations that last for at least three years, and the real devaluation induces significant trade flows that are distributed over a two‐to three‐year period. The evidence comes from two different samples, 1953‐73 and 1975‐84, involving twenty‐seven countries and sixty devaluation episodes.