North-South Trade and the Non-Neutrality of International Money

Wenli Cheng and Dingsheng Zhang

No 18-10, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper develops a Ricardian model with money to study North-South trade that is mediated by the currency of the North. The model shows that an increase in the supply of Northern money results in inflation being “exported” to the South. The increase in the supply of Northern money also has real effects: (1) it transfers real resources from the South to the North, lowers the wage rate in the South relative to that in the North, and worsens the terms of trade for the South; and (2) it leads to structural changes in both economies by encouraging the expansion of the tradable sector in the South and the expansion of the non-tradable sector in the North.

Keywords: North-South trade; demand for money; demand for foreign exchange; monetary policy; money non-neutrality (search for similar items in EconPapers)
JEL-codes: E41 F11 F42 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2010-05
New Economics Papers: this item is included in nep-int and nep-mon
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