Potential impacts of the devaluation of Nepalese currency: A general equilibrium approach Sanjaya Acharya * New ERA Development Research Institute, Kalopul, Rudramati Marga, PO Box 722, Kathmandu, Nepal 1. Introduction Depreciation of the exchange rate of domestic currency is the most frequent outcome of exchange rate liberalisation in many developing countries. Moreover, devaluation of domestic currency is also one of the major components of the orthodox stabilisation strategy. Whatever the reason for the depreciation of the currency of many developing countries in the long run, the impacts are not only pervasive but also deep. In addition to some theoretical studies, some partial analyses in measuring the impacts of the devaluation of the currencies of developing economies are also apparent, while studies that followed the general system approach are quite limited. The latter have not yet covered Economic Systems 34 (2010) 413–436 ARTICLE INFO Article history: Received 20 January 2009 Received in revised form 26 October 2009 Accepted 8 January 2010 JEL classification: C15, C68, D31, D33 Keywords: Devaluation Growth Distribution Macroeconomic features CGE model ABSTRACT This paper measures the potential impacts of the devaluation of domestic currency of the small, developing, landlocked and transition South Asian economy of Nepal, which is lagging behind in policy studies. The impacts on growth, distribution, price changes in factor and product markets, and on selected macroeconomic features are measured. Using a computable general equilibrium model applied to social accounting matrix data, we conclude that devaluation is expansionary but mostly benefits the rich, thus leading to a more uneven income distribution. In general, the expansion of economic activities occurs in agricultural and industrial sectors, whereas services activities contract. However, when the rate of devaluation is high, the agricultural sector also starts contracting. To this typical developing economy, devaluation causes an improvement in saving investment and export/import ratios, whereas the budget deficit widens. ß 2010 Elsevier B.V. All rights reserved. * Tel.: +977 1 4423176; fax: +977 1 4419562. E-mail addresses: sanjaya@newera.wlink.com.np, schwarz@osteuropa-institut.de. Contents lists available at ScienceDirect Economic Systems journal homepage: www.elsevier.com/locate/ecosys 0939-3625/$ – see front matter ß 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ecosys.2010.01.005