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North-South Trade and the Non-Neutrality of International Money

Author

Listed:
  • Wenli Cheng
  • Dingsheng Zhang

Abstract

This paper develops a Ricardian model with money to study North-South trade that is mediated by the currency of the North. The model shows that an increase in the supply of Northern money results in inflation being “exported†to the South. The increase in the supply of Northern money also has real effects: (1) it transfers real resources from the South to the North, lowers the wage rate in the South relative to that in the North, and worsens the terms of trade for the South; and (2) it leads to structural changes in both economies by encouraging the expansion of the tradable sector in the South and the expansion of the non-tradable sector in the North.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang, 2010. "North-South Trade and the Non-Neutrality of International Money," Monash Economics Working Papers 18-10, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2010-18
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2010/1810northchengzhang.pdf
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    More about this item

    Keywords

    North-South trade; demand for money; demand for foreign exchange; monetary policy; money non-neutrality;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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