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Effects of Inflation on the Pattern of International Trade

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  • Alan C. Stockman

Abstract

This paper examines the relationship between inflation, exchange rates, and the pattern of international trade and payments in a small economy with utility-maximizing agents and a transactions demand for money. Fully anticipated inflation has real effects in the model through its role as a tax on money and thereby on monetary transactions. An increase in the rate of monetary expansion generally reduces the value of domestic output and alters the composition of domestic production. The result is a change in the pattern of international comparative advantage and trade flows. The initial depreciation of the exchange rate following an increase in the rate of monetary expansion is accompanied by a trade surplus and capital outflow, while the subsequent depreciation is accompanied by a trade deficit.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 18 (1985)
Issue (Month): 3 (August)
Pages: 587-601

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Handle: RePEc:cje:issued:v:18:y:1985:i:3:p:587-601

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References

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  1. Weiss, Laurence, 1980. "A Model of International Trade and Finance," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 277-92, September.
  2. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-98, August.
  3. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June.
  4. Rodriguez, Carlos Alfredo, 1980. "The Role of Trade Flows in Exchange Rate Determination: A Rational Expectations Approach," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1148-58, December.
  5. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  6. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-61, December.
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Cited by:
  1. Lahiri, Amartya, 2001. "Exchange rate based stabilizations under real frictions: The role of endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1157-1177, August.
  2. Jill A. Holman & Felix K. Rioja, 1998. "International transmission of anticipated inflation under alternative exchange-rate regimes," Research Working Paper 99-04, Federal Reserve Bank of Kansas City.
  3. Greenwood, J. & Williamson, S.D., 1988. "International Financial Intermediation And Aggregate Fluctuations Under Alternative Exchange Rate Regimes," RCER Working Papers 120, University of Rochester - Center for Economic Research (RCER).
  4. Subhani, Muhammad Imtiaz, 2009. "Bilateral trade: a study on SAARC countries," MPRA Paper 36158, University Library of Munich, Germany.
  5. Benedikt Braumann, 2001. "High Inflation and Real Wages," IMF Working Papers 01/50, International Monetary Fund.

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