Modeling the Effects of Devaluation on Prices, Output and the Trade Balance: The Philippine Experience

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Based on the assumption that the economy undertaking the devaluation is a small open economy, this paper presents the following model: monetarist small country model with importables and exportables but without non-tradables, monetarist small country model with importables and exportables but with non-tradables and model of sticky prices of non-traded goods. While devaluation could still improve the trade balance as suggested by these models, analysis of the effects of devaluation in a small open economy using the models presented here is more appropriate than those on the traditional elasticities approach.