Assessing the Marshall–Lerner condition within a stock-flow consistent model

Emilio Carnevali, Giuseppe Fontana, Marco Veronese Passarella

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

We derive the general equilibrium condition for the terms of trade in a two-country economy model. We show that the Marshall–Lerner condition is only a special case of this condition, in which a full exchange rate pass-through to import prices is assumed. In fact, the Marshall–Lerner condition is not even a ‘useful approximation’ of the general condition. For the full pass-through assumption has destabilising, rather than stabilizing, effects, when it is introduced in a stock-flow consistent dynamic model. More generally, the higher (lower) the pass-through, the slower (quicker) is the adjustment of the economy towards the equilibrium. This is tantamount to saying that the speed of adjustment is a positive function of the strategic behaviour of the exporters, who attempt to retain their market share by keeping their foreign currency-denominated prices unchanged.
Original languageEnglish
Pages (from-to)891-918
Number of pages28
JournalCambridge Journal of Economics
Volume44
Issue number4
Early online date11 Feb 2020
DOIs
Publication statusPublished - 7 Jul 2020
Externally publishedYes

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