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Assessing the Marshall–Lerner condition within a stock-flow consistent model

Author

Listed:
  • Emilio Carnevali
  • Giuseppe Fontana
  • Marco Veronese Passarella

Abstract

We derive the general equilibrium condition for the terms of trade in a two-country economy model. We show that the Marshall–Lerner condition is only a special case of this condition, in which a full exchange rate pass-through to import prices is assumed. In fact, the Marshall–Lerner condition is not even a ‘useful approximation’ of the general condition. For the full pass-through assumption has destabilising, rather than stabilizing, effects, when it is introduced in a stock-flow consistent dynamic model. More generally, the higher (lower) the pass-through, the slower (quicker) is the adjustment of the economy towards the equilibrium. This is tantamount to saying that the speed of adjustment is a positive function of the strategic behaviour of the exporters, who attempt to retain their market share by keeping their foreign currency-denominated prices unchanged.

Suggested Citation

  • Emilio Carnevali & Giuseppe Fontana & Marco Veronese Passarella, 2020. "Assessing the Marshall–Lerner condition within a stock-flow consistent model," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 44(4), pages 891-918.
  • Handle: RePEc:oup:cambje:v:44:y:2020:i:4:p:891-918.
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    File URL: http://hdl.handle.net/10.1093/cje/bez060
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    Cited by:

    1. Lorenzo Nalin & Giuliano Toshiro Yajima, 2021. "Commodities fluctuations, cross border flows and financial innovation: A stock‐flow analysis," Metroeconomica, Wiley Blackwell, vol. 72(3), pages 539-579, July.

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