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1、Copyright 2004, South-Western College PublishingInternational EconomicsBy Robert J. Carbaugh9th EditionChapter 15:Exchange-Rate Adjustments and the Balance of PaymentsCarbaugh, Chap. 152Exchange rate adjustmentsExchange-rate adjustment and the BOPw Automatic mechanisms may restore balance-of-payment

2、s equilibrium, but at the cost of recession or inflationw As an alternative, governments allow exchange rates to change Floating exchange rates, determined by markets Devaluing or revaluing fixed exchange ratesCarbaugh, Chap. 153Exchange rate adjustmentsExchange rate effects on costs & pricesw I

3、mpact of appreciation or depreciation on costs depends on the proportion of inputs priced in foreign vs. domestic currency As foreign-currency denominated costs rise as a proportion of total costs, exchange rate changes have less effect on the foreign currency price and more effect on the domestic p

4、rice If foreign-currency costs are a small part of total costs, exchange rate changes have more impact on foreign currency price of the product and less on domestic priceCarbaugh, Chap. 154Exchange rate adjustmentsExchange rate effects on costs & pricesw Generally, currency appreciation increase

5、s the costs of exports in foreign currency terms, which hurts total exports (while depreciation encourages exports) Effect on prices is modified by the ability and willingness of sellers to change their pricesCarbaugh, Chap. 155Exchange rate adjustmentsRequirements for successful devaluationw When c

6、an devaluation correct a payments deficit?w Elasticity approach Emphasizes price effects; devaluation works best when demand is elasticw Absorption approach Focus on income effects; domestic spending must fall, toow Monetary approach Focus on change in purchasing power of money and effect on domesti

7、c spendingCarbaugh, Chap. 156Devaluation as adjustment toolElasticity approachw Impact of currency devaluation depends on price elasticity of domestic demand for imports and of foreign demand for exports The less either foreign or domestic demand responds to price changes, the less effect a devaluat

8、ion will have on the payments imbalanceCarbaugh, Chap. 157Devaluation as adjustment toolElasticity approachw Marshall-Lerner condition: Devaluation will improve the trade balance if domestic demand elasticity for imports plus foreign demand elasticity for exports is greater than 1 Devaluation will w

9、orsen the trade balance if the sum of the two elasticities is less than 1 If the sum is equal to 1, devaluation will have no effectCarbaugh, Chap. 158Devaluation as adjustment toolDevaluation and time horizonw The J-curve effect: in short run, devaluation worsens trade balance, but with time the bal

10、ance improves (3-5 years) Recognition lags; decision lags; delivery lags; replacement lags; production lagsw Currency pass-through: effect of devaluation depends on how quickly producers pass on higher or lower costs to their customersCarbaugh, Chap. 159Devaluation as adjustment toolAbsorption appro

11、achw Emphasizes impact of devaluation on spending behavior of domestic economyw Balance of trade is the difference between total domestic output and domestic absorption Positive balance means output exceeds domestic spending Negative balance means spending exceeds total productionCarbaugh, Chap. 151

12、0Devaluation as adjustment toolAbsorption approach (contd)w Devaluation will only improve the trade balance if output rises relative to domestic absorption If an economy is operating below capacity, a devaluation will shift resources into export production and encourage spending on import substitute

13、s If an economy is operating at full employment, production cannot rise; trade balance can only be cut by slowing the domestic economyCarbaugh, Chap. 1511Devaluation as adjustment toolMonetary approachw Elasticity and absorption approaches apply only to the trade balance; monetary approach includes

14、capital accountw Devaluation may induce a temporary improvement in the balance of payments Devaluation increases the domestic price level, increasing demand for money and drawing foreign capital flows (because of higher interest rates that result)Carbaugh, Chap. 1512Devaluation as adjustment toolMonetary approach (contd)w In the long run, th