Abstract:
In this paper we attempt to assess the relevance of correspondence
principle in determining the possible effects of currency devaluation on
balance of payments and employment. We developed a model in line with
Buffie (1986) who derived a very strong result that if the model is locally stable
and if labour and imported inputs are gross substitutes then devaluation will
certainly improve labour employment and balance of payments at the same
time. For the general production function the Buffie model predicts that
devaluation cannot contract both employment and balance of payments at the
same time since either of them is incompatible with the stability of the model.
Buffie results by and large depend upon stability conditions of the model and
what we have demonstrated that stability analysis of the model unfortunately
is not free of error. In the corrected model we observe that the results derived
by Buffie do not hold in general.
