Re: Fixed vs. flexible exchange rates

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

--- pdavidso <pdavidso@xxxxxxx> wrote:
> >===== 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

So you are assuming that exporters don't sell at
'world prices' but when their local exchange rate
falls sell at lower prices?  Fine, that's called
deteriorating terms of trade.  That's a different
assumption.

Here's the rub.  Assuming the country in question is a
price taker, I'd say the causation runs from
deteriorating terms of trade to currency adjustment,
not vice versa.  And that has nothing to do with
full employment.  It is a shift in relative value of
traded goods and services.

If the country is a price setter, it just needs
organization to make sure it's terms of trade are
maximized.


Warren

=====
Warren Mosler, www.mosler.org
c/o James River Capital Corp
5007 Chandler's Wharf, Suite 201/202
Christiansted, USVI  00820
340-719-8813 office phone
340-719-8804 Fax
Primary email contact:  mosler@xxxxxxxxxxxxxx

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