Re: Fixed vs. flexible exchange rates

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From Warren Mosler <mosler@xxxxxxxxxxxxxx> =====
>>
>> I think those with those who think that a fixed
>> exchange rate is the
>> problem and a flexible exchange rate is the solution
>> -- suffer from a
>> failure to understand the lack of Marshall -Lerner
>> conditions in modern day
>> international trade so that devaluation exacerbates
>> the problem -- as those
>> who speak about the J-curve are implying for in the
>> short-run the downward
>> slope in the J is almost inevitable and -- you will
>> note as I demonstrate
>> in my book,it is assumed thatthe  upward slope of
>> the J kicks in --in the
>> longer run, the Marshall-Lerner condition kicks in.
>
>But again, here you imply imports are a 'problem?'

No what the absence of the Marshall-Lerner condition means is that if there is
intially an import surplus (in terms of payments -- cause we do not know what
it means to have a physical import surplus), then a decline in the exchange
rate means THE IMPORT SURPLUS INVALUE TERMS INCREASES!!!

>And that a weaker exchange rate won't reduce imports.
>But imports are a benefit, not a cost.  And exports
>are the cost of imports.

This increase in the import surplus (not in physical goods terms but in value
terms) will be associated with an increase in physical exports and a decrease
in physical imports -- thereby  INCREASING the costs (in your temrinology) to
the economy that permits its exchange rate to decline when it runs an import
surplus

>I agree that is an incorrect assumption.  What I have
>said is that a country with a flexible exchange rate
>can maintain full employment regardless at all times,
>via elr, for example, or even more mainstream demand
>management.
>
>at least in the long run -- when
>> we are all dead. In the
>> short-run interim in which we all live, there can be
>> many painful, and
>> perhaps even deadly,  income effects of flexible
>> exchange rates.

But if the Marshall-Lerner condition is not applicable, then even in your
framework, full employment will occur with a REDUCTION in the real income of
the economy in the aggregate and therefore with a reduction in the average
standard of living despite elr!
>
>Yes, that domestic full employment policy can turn to
>the advantage of the domestic standard of living.

No   not if the Marshall -Lerner condition is not applicable!

>These 'deadly' income effects are generally due to
>imports 'costing jobs' and income.  But with a
>floating exchange rate the domestic govt. can simply
>hire the unemployed to make sure their income is
>continued or manage additional net spending to make
>sure there is sufficient agg demand to keep domestic
>income high enough.

You can maintain money income perhaps but real income will, on average,
decline.
>> For a further discussion see my article "Are Fixed
>> Exchange Rates the
>> Problem and Flexible Exchange Rates the Solution?"
>> in the Spring 2003 issue
>> of the EASTERN ECONOMIC JOURNAL.

Paul

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
office phone #;(865)974-4221; office fax# (865)974-1686 or (865)974-4601
home phone and fax # (865)692-0802
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html