Does devaluation improve the current account?

This paper incorporates the link between devaluation, foreign interest payments, and the current account into a fairly general macroeconomic model in which exchange rate changes influence aggregate demand through exports, imports, and expenditure as well as aggregate supply via the cost of imported factors of production. On the basis of available statistical estimates of the behavioral and structural parameters of the model, an attempt is made to assess the empirical importance of this link, among others, in a group of highly indebted industrial and developing countries. By and large, the empirical results indicate that high foreign debt and interest payments tend to reduce the short- to medium-run effect of devaluation on national income, especially in the LDCs, but make little difference to its generally positive effect on the current account.