Nominal and real devaluation during trade liberalization: aid-induced dutch disease in Sri Lanka
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Date
1991-06
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Abstract
In 1977 the Sri Lankan government embarked on an extensive programme of liberalization, an important element of which was devaluation to ensure a competitive real exchange rate. However, the eighties were marked by an increasing divergence between the real and nominal exchange rates, the depreciation of the former not being matched by similar movements of the latter. This paper presents an econometric model of real exchange rate behavior in Sri Lanka. Amongst other things, it is shown that increased aid inflows have made a significant contribution to the appreciation of the real exchange rate.
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trade liberalisation