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Marshall-Lerner condition and economic globalization

  • Paul Welfens

    ()

The analysis considers the impact of FDI inflows and FDI outflows and shows that the presence of (cumulated) FDI requires higher import elasticities in absolute terms than stated in the standard Marshall Lerner condition. One may derive a range for the elasticity of the ratio of exports to imports with respect to the real exchange rate, namely that the sum of the absolute import elasticities at home and abroad must exceed unity plus an addi-tional parameter - for standard special cases the sum of both elasticities must exceed 2 if a real depreciation is to improve the real current account. Not only can one determine a modified Marshall Lerner condition for a world economy with economic globalization, rather one also can get new insights from considering a broader macroeconomic perspective. The insights obtained are highly relevant for the discussion about high deficits of the US and high surplus positions of countries such as Japan, China and Germany. The relevance of real income effects for current account adjustment - much emphasized by McKinnon - is emphasized here in a specific way: there is a direct real income effect of changes of the real exchange rate.

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File URL: http://hdl.handle.net/10.1007/s10368-010-0177-5
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Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 9 (2012)
Issue (Month): 2 (June)
Pages: 191-207

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Handle: RePEc:kap:iecepo:v:9:y:2012:i:2:p:191-207
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  1. Kenneth A. Froot & Jeremy C. Stein, 1989. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," NBER Working Papers 2914, National Bureau of Economic Research, Inc.
  2. Bussière, M. & Delle Chiaie, S. & Peltonen, T. A., 2013. "Exchange Rate Pass-Through in the Global Economy," Working papers 424, Banque de France.
  3. Bussière, Matthieu & Peltonen, Tuomas, 2008. "Exchange rate pass-through in the global economy – the role of emerging market economies," BOFIT Discussion Papers 25/2008, Bank of Finland, Institute for Economies in Transition.
  4. Richard C. Marston, 1990. "Price Behavior in Japanese and U.S. Manufacturing," NBER Working Papers 3364, National Bureau of Economic Research, Inc.
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