Developing economies have relied upon devaluation to assist in the correction of fundamental disequilibrium in the balance of payment. As posited by conventional economic theory and proven by empirical research, a devaluation improves the balance of payments by reducing the demand for imports and increasing the supply of exports. However, recent research on devaluation insists that correction of the trade deficit occurs concurrently with income reduction. Using a three‐market Keynesian model, the conclusion reached in this research on the Jamaican economy is that a devaluation is contractionary in the short run and expansionary in the long run.
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