Currency Substitution, Foreign Inflation, and Terms-of-Trade Dynamics

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Title:	Currency Substitution, Foreign Inflation, and Terms-of-Trade Dynamics
Authors:	Chen, Chau-nan;Tsaur, Tien-wang;劉順傑;Liu, Shun-chieh
Contributors:	淡江大學財務金融學系
Date:	1989-08
Issue Date:	2009-11-30 17:51:59 (UTC+8)
Publisher:	Chicago: University of Chicago Press
Abstract:	This paper incorporates rational expectations, full price flexibility, and currency substitution into the usual small-economy model, taking explicit account of inflation abroad. Not only will the steady-state terms of trade be affected by an increase in the rate of monetary expansion when the inflation rate abroad is assumed to be nonzero, but its dynamic path may also be different from the usual case in which inflation abroad is ignored. It has been shown that if the import demands are relatively inelastic, the terms of trade will undershoot their equilibrium value; if the import demands are elastic, the terms of trade will overshoot. The key to these diametrically opposite results is the degree of ultimate deterioration in the terms of trade, which, in turn, turn on the size of the two import demand elasticities.
Relation:	Journal of political economy 97(4), pp.955-964
DOI:	10.1086/261635
Appears in Collections:	[Graduate Institute & Department of Banking and Finance] Journal Article

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