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Effects of Inflation on the Pattern of International Trade

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Author Info
Alan C. Stockman

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0713.

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Date of creation: Dec 1985
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Handle: RePEc:nbr:nberwo:0713

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Laurence Weiss, 1978. "A Model of International Trade and Finance," Cowles Foundation Discussion Papers 499, Cowles Foundation, Yale University. [Downloadable!]
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  2. 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. [Downloadable!] (restricted)
  3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
  7. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October. [Downloadable!] (restricted)
  8. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Oxford University Press, vol. 18(2), pages 203-20, April.
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  1. Benedikt Braumann, . "High Inflation and Real Wages," IMF Working Papers 01/50, International Monetary Fund. [Downloadable!]
  2. Jeremy Greenwood & Stephen D. Williamson, 1988. "International financial intermediation and aggregate fluctuations under alternative exchange rate regimes," Staff Report 112, Federal Reserve Bank of Minneapolis. [Downloadable!]
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