Currency Depreciation, Hoarding, and Relative Prices

descriptionPublicationkeyboard_double_arrow_right Article 01 Jul 1973 English Publisher:University of Chicago PressJournal:Journal of Political Economy, volume 81, pages 893-915 (issn: 0022-3808, eissn: 1537-534X,

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Authors: Dornbusch, Rudiger;

doi: 10.1086/260087

Currency Depreciation, Hoarding, and Relative Prices

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Abstract

This paper investigates the effects of devaluation in a two-commodity, two- country, and two-money model with full employment and price flexibility. Primary emphasis is placed on the effect of a change in the real value of money on real expenditure and on the effects on relative prices of a redistribution of expenditure between countries. The stability properties of the model are related to the transfer problem in barter theory and to the Marshall-Lerner condition. Given stability, it is shown that a devaluation will improve the balance of payments.

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