The inflationary impact of repetitive devaluation

It is suggested that in countries which have sustained a significant inflationary condition and, as a consequence, have frequently changed their foreign‐exchange rate, price expectations may be developed on the basis of these changes. In order to examine this hypothesis a macroeconomic model is built and econometric tests are undertaken using quarterly data for Brazil, Chile, and Uruguay. The author warns that since repetitive devaluation‐type policies can fuel price expectations, they may only lead to increased domestic inflationary pressures, balance of trade deficits, and further rounds of devaluation.