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Other Economics

1978

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Full-Text Articles in International Economics

Devaluation, Wealth Effects, And Relative Prices, Harvey Lapan, Walter Enders Sep 1978

Devaluation, Wealth Effects, And Relative Prices, Harvey Lapan, Walter Enders

Economics Publications

The emergence of the portfolio balance approach 1 has led to a reformulation of the causes of balance-of-trade and payments disequilibria. According to this approach, balance-of-trade deficits and surpluses reflect discrepancies between desired and actual wealth holdings; while balance-of­ payments deficits and surpluses reflect discrepancies between desired and actual money holdings. Thus, balance-of-trade and payments disequilibria are viewed as representing disequilibria within the asset markets. Using this framework several authors2 have examined the self-correcting nature of disequilibria within the balance­ of-payments accounts and the ability of a devaluation to reduce the magnitude of a disequilibrium.