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Real Exchange Rates and the International Mobility of Capital

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  • Anwar M. Shaikh

Abstract

This paper demonstrates that the terms of trade are determined by the equalization of profit rates across international regulating capitals, for socially determined national real wages. This provides a classical/Marxian basis for the explanation of real exchange rates, based on the same principle of absolute cost advantage which rules national prices. Large international flows of direct investment are not necessary for this result, since the international mobility of financial capital is sufficient. Such a determination of the terms of trade implies that international trade will generally give rise to persistent structural trade imbalances covered by endogenously generated capital flows which will fill any existing gaps in the overall balance of payments. It also implies that devaluations will not have a lasting effect on trade balances, unless they are also attended by fundamental changes in national real wages or productivities. Finally, it implies that neither the absolute nor the relative version of the Purchasing Power Parity hypothesis (PPP) will generally hold, with the exception that the relative version of PPP will appear to hold when a country experiences a relatively high inflation rate. Such patterns are well documented, and in contrast to comparative advantage or PPP theory, the present approach implies that the existing historical record is perfectly coherent. Empirical tests of the propositions advanced in this paper have been conducted elsewhere, with good results.

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  • Anwar M. Shaikh, 1999. "Real Exchange Rates and the International Mobility of Capital," Economics Working Paper Archive wp_265, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_265
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    References listed on IDEAS

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    1. Dornbusch, Rudiger, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Wiley Blackwell, pages 401-432.
    2. Shaikh, Anwar, 1980. "Marxian Competition versus Perfect Competition: Further Comments on the So-Called Choice of Technique," Cambridge Journal of Economics, Oxford University Press, vol. 4(1), pages 75-83, March.
    3. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, December.
    4. Anwar Shaikh & Rania Antonopoulos, 1998. "Explaining long term exchange rate behavior in the United States and Japan," Macroeconomics 9809011, EconWPA.
    5. Nakatani, Takeshi, 1980. "The Law of Falling Rate of Profit and the Competitive Battle: Comment on Shaikh," Cambridge Journal of Economics, Oxford University Press, vol. 4(1), pages 65-68, March.
    6. Ken Froot & Kenneth Rogoff, "undated". "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
    7. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, December.
    8. Bienenfeld, Mel, 1988. "Regularity in Price Changes as an Effect of Changes in Distribution," Cambridge Journal of Economics, Oxford University Press, vol. 12(2), pages 247-255, June.
    9. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
    10. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Frederico Gonzaga Jayme Jr, 2001. "Notes on trade and growth," Textos para Discussão Cedeplar-UFMG td166, Cedeplar, Universidade Federal de Minas Gerais.
    2. John Weeks, 2009. "The Effectiveness of Monetary Policy Reconsidered," Working Papers wp202, Political Economy Research Institute, University of Massachusetts at Amherst.
    3. Frederico Gonzaga Jayme Junior, 2001. "Balance-of-payments constrained economic growth in Brazil," Textos para Discussão Cedeplar-UFMG td155, Cedeplar, Universidade Federal de Minas Gerais.

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