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Effects of Inflation on the Pattern of International Trade

  • Alan C. Stockman

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: Jul 1981
Date of revision:
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. 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.
  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  3. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 122, UCLA Department of Economics.
  4. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  5. 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.
  6. Weiss, Laurence, 1980. "A Model of International Trade and Finance," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 277-92, September.
  7. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  8. 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.
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