Carnevali, E, Fontana, G and Passarella, MV orcid.org/0000-0001-7652-5952 (2020) Assessing the Marshall-Lerner condition within a stock-flow consistent model. Cambridge Journal of Economics, 44 (4). pp. 891-918. ISSN 0309-166X
Abstract
We derive the general equilibrium condition for the terms of trade in a two-country economy model. We show that the Marshall–Lerner condition is only a special case of this condition, in which a full exchange rate pass-through to import prices is assumed. In fact, the Marshall–Lerner condition is not even a ‘useful approximation’ of the general condition. For the full pass-through assumption has destabilising, rather than stabilizing, effects, when it is introduced in a stock-flow consistent dynamic model. More generally, the higher (lower) the pass-through, the slower (quicker) is the adjustment of the economy towards the equilibrium. This is tantamount to saying that the speed of adjustment is a positive function of the strategic behaviour of the exporters, who attempt to retain their market share by keeping their foreign currency-denominated prices unchanged.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © The Author(s) 2020. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.. This is an author produced version of an article published in Cambridge Journal of Economics. Uploaded in accordance with the publisher's self-archiving policy. |
Keywords: | Marshall-Lerner Condition, Stock-Flow Consistent (SFC) Models, Exchange Rate, Sticky Prices |
Dates: |
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Institution: | The University of Leeds |
Academic Units: | The University of Leeds > Faculty of Business (Leeds) > Economics Division (LUBS) (Leeds) |
Depositing User: | Symplectic Publications |
Date Deposited: | 25 Nov 2020 14:56 |
Last Modified: | 11 Feb 2022 01:38 |
Status: | Published |
Publisher: | Oxford University Press (OUP) |
Identification Number: | 10.1093/cje/bez060 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:168336 |