The Influence of Exchange Rate Changes on Prices
A Study of 18 Industrial Countries
Bibliographic Data
| ID | 9727180 |
|---|---|
| Authors | Wayne Robinson (0000-0002-8793-7466), T R Webb, M A Townsend (0009-0001-8662-0408) |
| Year | 1979 |
| Volume | 46 |
| Issue | 181 |
| Pages | 27 |
| Publication date | 1979-02-01 |
| Peer Reviewed | Yes |
| Open Access | No |
| Type | ARTICLE |
| Venue | Economica (JOURNAL) |
| Journal identifiers | ISSN: 0013-0427 • E-ISSN: 1468-0335 |
| Publisher | JSTOR (PUBLISHER) |
| DOI | 10.2307/2553094 |
| OpenAlex | W2028691008 |
| Language | EN |
| Citations received | 3 |
| References cited | 3 |
A key issue in contemporary economic policy-making concerns the effect of rate changes on prices. The traditional view of rate movements, prevalent up to the 1 960s, took it almost for granted that a devaluation would reduce the foreign currency price of exports and increase the home currency price of imports. The empirical debate centred on the price elasticities of demand for those exports and imports. If the elasticities were sufficiently large, the devaluation would work; i.e., the volume effects (higher exports, lower imports) would outweigh the adverse movement in the terms of trade (cheaper exports, dearer imports) and the trade balance would improve (Robinson, 1947). This classic analysis was essentially static and was attacked on the grounds that it ignored the long-run effect on prices of a parity change. These effects are taken account of by the monetary view of the balance of payments, which stresses the effect of balance of payments disequilibrium on the supply and hence on prices. On this view (summarized in Johnson, 1972) a devaluation may initially create a balance of payments surplus, but this will then increase the supply and set in motion an inflationary process which restores the price level of the devaluing country, measured in foreign currency terms, to its pre-devaluation level. At this point the external surplus disappears and the country is back in its original position, but with a once-for-all increase in its reserves, accumulated while the price adjustment was occurring. The above analysis justifies the claim that the rate, being an essentially monetary phenomenon, can affect only money things (i.e. the general price level) and cannot permanently change the underlying phenomena such as the trade balance or the terms of trade. This view of rate changes can be justified by another line of argument: the tradeable output of each country has a determinate value. In other words, if trade was conducted by barter, a hundred Leyland Minis would be freely exchanged for some definite number of Volkswagen Golfs or Renaults 5s, the real barter rate of exchange of those goods. In equilibrium, UK, French and German prices and rates should be such that the sterling value of the hundred Minis should, when converted into German marks or French francs at the market rate of exchange, exactly purchase the number of Volkswagens or Renaults given by the barter rate of exchange. Clearly, a change in the rate is not going to alter people's preferences for Minis as against Volkswagens or Renaults. Hence, starting from a position in which prices and rates are in equilibrium, any rate change must in the long run be completely offset by price movements which restore the rate at which Minis are exchanged for Volkswagens and Renaults
Economics · Exchange rate · Monetary economics · Economic Theory and Policy · Global Financial Crisis and Policies · Monetary Policy and Economic Impact
| Unique citing works | 3 |
|---|---|
| Citations per year | 0,07 |
| Citation span | 1985 - 1987 (3) |
| Citation velocity | historical |
| Highly cited | No |