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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

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: Jul 1981
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Publication status: published as Stockman, Alan C. "Effects of Inflation on the Pattern of International Trade," Canadian Journal of Economics, Vol. XVIII, No. 3, (August 1985), pp. 587-601.
Handle: RePEc:nbr:nberwo:0713

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  1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  2. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  3. Maurice Obstfeld, 1980. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," NBER Working Papers 0599, National Bureau of Economic Research, Inc.
  4. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(4), pages 673-98, August.
  5. 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, University of Chicago Press, vol. 88(6), pages 1148-58, December.
  6. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(3), pages 561-77, June.
  7. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 18(2), pages 203-20, April.
  8. Weiss, Laurence, 1980. "A Model of International Trade and Finance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 95(2), pages 277-92, September.
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Cited by:
  1. Jill A. Holman & Felix K. Rioja, 1998. "International transmission of anticipated inflation under alternative exchange-rate regimes," Research Working Paper, Federal Reserve Bank of Kansas City 99-04, Federal Reserve Bank of Kansas City.
  2. Lahiri, Amartya, 2001. "Exchange rate based stabilizations under real frictions: The role of endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(8), pages 1157-1177, August.
  3. Subhani, Muhammad Imtiaz, 2009. "Bilateral trade: a study on SAARC countries," MPRA Paper 36158, University Library of Munich, Germany.
  4. Greenwood, J. & Williamson, S.D., 1989. "International Financial Intermediation And Aggregate Fluctuations Under Alternative Exchange Rate Regimes," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers, University of Western Ontario, The Centre for the Study of International Economic Relations 8902c, University of Western Ontario, The Centre for the Study of International Economic Relations.
  5. Benedikt Braumann, 2001. "High Inflation and Real Wages," IMF Working Papers 01/50, International Monetary Fund.

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