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Monetary basis of trade imbalance

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  • Seung-Dong Lee
  • Jonathan Sampson

Abstract

The purpose of this paper is to lay simple yet elegant, formal microeconomic foundations for the theory that monetary policy is a principal determinant of international trade imbalance. Foreign exchange is a different form of real liquidity, not a perfect substitute for domestic currency. As a result, foreign money is traded as a commodity in exchange for consumption goods. If the monetary policies of two countries differ, a permanently unbalanced flow of goods may arise. Specifically, this paper argues that a high-inflation regime is likely to induce a perpetual trade deficit. Copyright International Atlantic Economic Society 2000

Suggested Citation

  • Seung-Dong Lee & Jonathan Sampson, 2000. "Monetary basis of trade imbalance," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 28(4), pages 427-434, December.
    • Handle: RePEc:kap:atlecj:v:28:y:2000:i:4:p:427-434
    DOI: 10.1007/BF02298395
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    References listed on IDEAS

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    1. Gale, David, 1971. "General equilibrium with imbalance of trade," Journal of International Economics, Elsevier, vol. 1(2), pages 141-158, May.
    2. Liviatan, Nissan, 1981. "Monetary Expansion and Real Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1218-1227, December.
    3. Engel, Charles, 1989. "The trade balance and real exchange rate under currency substitution," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 47-58, March.
    4. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-625, June.
    5. Fisher, Eric O'n., 1990. "Sustainable balance of trade deficits," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 411-430, June.
    6. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
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