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A MethodFor Separating Iincome & Substitution Effects Of Exchange Rate Changes On Aggregate Demand

  • John J. Heim

    ()

    (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)

Regression estimates of exchange rate total effects on aggregate demand are broken into separate income and substitution effects. Total effects estimates can seem contrary to theory. Separating them into their two components shows this is not the case. The separation method also provides a simple test to determine if imports are normal or inferior goods. The paper finds consumer imports are normal goods, but investment imports are inferior goods. The paper shows that if import total effects exceed domestic total effects, imports are a normal good. If smaller, they are inferior goods.

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File URL: http://www.economics.rpi.edu/workingpapers/rpi0901.pdf
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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0901.

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Date of creation: Feb 2009
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Handle: RePEc:rpi:rpiwpe:0901
Contact details of provider: Web page: http://www.economics.rpi.edu/
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  1. Michael Baker & Jonathan Gruber & Kevin Milligan, 2003. "The retirement incentive effects of Canada's Income Security programs," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 261-290, May.
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