Monetary basis of trade imbalance

Seung-Dong Lee and Jonathan Sampson

Atlantic Economic Journal, 2000, vol. 28, issue 4, 427-434

Abstract: The purpose of this paper is to lay simple yet elegant, formal microeconomic foundations for the theory that monetary policy is a principal determinant of international trade imbalance. Foreign exchange is a different form of real liquidity, not a perfect substitute for domestic currency. As a result, foreign money is traded as a commodity in exchange for consumption goods. If the monetary policies of two countries differ, a permanently unbalanced flow of goods may arise. Specifically, this paper argues that a high-inflation regime is likely to induce a perpetual trade deficit. Copyright International Atlantic Economic Society 2000

Date: 2000
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DOI: 10.1007/BF02298395

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