1、International EconomicsBy Robert J. Carbaugh8th EditionChapter 15:Exchange-Rate Adjustments and the Balance of PaymentsExchange rate adjustmentsExchange-rate adjustment and the BOPAutomatic mechanisms may restore balance-of-payments equilibrium, but at the cost of recession or inflationAs an alterna

2、tive, governments allow exchange rates to changeFloating exchange rates, determined by marketsDevaluing or revaluing fixed exchange rates2Exchange rate adjustmentsExchange rate effects on costs & pricesImpact of appreciation or depreciation on costs depends on the proportion of inputs priced in fore

3、ign vs. domestic currencyAs 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 priceIf foreign-currency costs are a small part of total costs, exchange rate changes have more imp

4、act on foreign currency price of the product and less on domestic price3Exchange rate adjustmentsExchange rate effects on costs & pricesGenerally, currency appreciation increases the costs of exports in foreign currency terms, which hurts total exports (while depreciation encourages exports)Effect o

5、n prices is modified by the ability and willingness of sellers to change their prices4Exchange rate adjustmentsRequirements for successful devaluationWhen can devaluation correct a payments deficit?Elasticity approachEmphasizes price effects; devaluation works best when demand is elasticAbsorption a

6、pproachFocus on income effects; domestic spending must fall, tooMonetary approachFocus on change in purchasing power of money and effect on domestic spending5Devaluation as adjustment toolElasticity approachImpact of currency devaluation depends on price elasticity of domestic demand for imports and

7、 of foreign demand for exportsThe less either foreign or domestic demand responds to price changes, the less effect a devaluation will have on the payments imbalance6Devaluation as adjustment toolElasticity approachMarshall-Lerner condition:Devaluation will improve the trade balance if domestic dema

8、nd elasticity for imports plus foreign demand elasticity for exports is greater than 1Devaluation will worsen the trade balance if the sum of the two elasticities is less than 1If the sum is equal to 1, devaluation will have no effect7Devaluation as adjustment toolDevaluation and time horizonThe J-c

9、urve effect: in short run, devaluation worsens trade balance, but with time the balance improves (3-5 years)Recognition lags; decision lags; delivery lags; replacement lags; production lagsCurrency pass-through: effect of devaluation depends on how quickly producers pass on higher or lower costs to

10、their customers8Devaluation as adjustment toolAbsorption approachEmphasizes impact of devaluation on spending behavior of domestic economyBalance of trade is the difference between total domestic output and domestic absorptionPositive balance means output exceeds domestic spendingNegative balance me

11、ans spending exceeds total production9Devaluation as adjustment toolAbsorption approach (contd)Devaluation will only improve the trade balance if output rises relative to domestic absorptionIf an economy is operating below capacity, a devaluation will shift resources into export production and encou

12、rage spending on import substitutesIf an economy is operating at full employment, production cannot rise; trade balance can only be cut by slowing the domestic economy10Devaluation as adjustment toolMonetary approachElasticity and absorption approaches apply only to the trade balance; monetary appro

13、ach includes capital accountDevaluation may induce a temporary improvement in the balance of paymentsDevaluation increases the domestic price level, increasing demand for money and drawing foreign capital flows (because of higher interest rates that result)11Devaluation as adjustment toolMonetary approach (contd)In the long run, the inflow of mone