Portal de Periódicos da CAPES

Exchange Rates and Fiscal Policy in a Popular Model of International Trade

2016; American Economic Association; Volume: 65; Issue: 5 Linguagem: Inglês

1944-7981

Rüdiger Dornbusch, C. F. Bickerdike, Joan Robinson,

Economic Theory and Policy

This paper develops a reinterpretation of the devaluation analysis in a popular model of international trade developed by Charles Bickerdike, Joan Robinson, and Lloyd Metzler. It has come to be known as the elasticity approach.1 That model, developed in terms of independent markets for imports and exports, has been criticized for its apparent lack of general equilibrium properties. The assumptions underlying the model have remained by and large implicit and vary across users, and the integration of this analysis with the and macroeconomics has never been demonstrated. All this is very much recognized and indeed application of the model is consistently accompanied by appropriate partial equilibrium, impact effect, or upper bound caveats. These shortcomings notwithstanding, the model continues to enjoy substantial popularity in policy discussions and interpretations of current events, in empirical work, and in recent textbooks in the field of international economics.' The BRM model is likely to remain the preferred tool in the analysis of trade balance issues along with the foreign trade multiplier model. It is therefore interesting and useful to enquire into its formal general equilibrium implications. This paper is concerned with one such interpretation involving a nontraded goods sector and a well-defined government policy that makes the analysis consistent with the absorption approach. While it may well be possible to generate alternative interpretations, the present analysis would seem to have the advantage of simplicity while at the same time pointing out the essential properties that would have to be satisfied by alternative treatments. In Section I a brief review of the BRM approach is offered. In Section II that approach is interpreted in terms of a simple model with nontraded goods and constant terms of trade. The implicit assumptions of the BRM model are brought to the f oreground by an explicit consideration of the market for home goods, the equilibrium conditions, and the role of the relative price of nontraded goods.3 Following that analysis, Section III considers the subsidiary issues that are raised by variable terms of trade. The notion of total elasticities is given an interpretation in Section IV where we return to the composite traded good model to explore alternative assumptions about absorption policies.