Maxi devaluations and cooper s hypothesis

Abstract

IN a recent paper, Pronab Sen has defended Cooper's contractionary devaluation hypothesis in a very interesting and lucid way ('Cooper's Contractionary Devaluation Hypothesis: A Note', EPW, July 27). In the true spirit of macro modelling, he has effectively demonstrated the validity of Cooper's hypothesis with important modifications through the six propositions derived from a simplified macro model. His most important proposition is his Result 4 which states that gross complementarity of home goods and imports in the domestic consumption is the necessary condition for the devaluation to be contractionary. Since it is a distinct (and maybe most likely) possibility to find gross complementarity between the home goods and imports in the domestic consumption in several developing countries, Sen concludes "that 'maxi' devaluations do not always need to be accompanied by contractionary fiscal and monetary policies". Something more is needed to arrive at this conclusion than what is contained in Sen's note.