Components of effective devaluation and the domestic rate of inflation: The case of Israel

Developing countries have frequently resorted to effective devaluation by changing either their formal rate of exchange, or by using non-formal components, such as taxes and subsidies. The ensuing increase in the domestic price of imports has inflationary effects. This paper analyses the Israeli experience to investigate the inflationary effects of increases in import prices and alternative methods of devaluation. It is found that formal and non-formal devaluation appear to have the same long-run effects on the price level, but are not the same in timing: A formal devaluation leads more quickly to increases in domestic prices.