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Journal of Economic Integration 2001 December;16(4) :590-616.
DOI: https://doi.org/10.11130/jei.2001.16.4.590
On the Trade Balance Response to Monetary Shocks : the Marshall-Lerner Conditions Reconsidered
Giovanni Lombardo 
Trinity College, Dublin
Copyright ©2001 Journal of Economic Integration
ABSTRACT
This paper studies the applicability of the Marshall-Lerner condition to the "basic" Obstfeld and Rogoff (1995) model. It shows that the Marshall-Lerner condition does apply to this class of models with homothetic preferences when product differentiation across countries is imposed. This paper also shows that, in certain cases, the intertemporal substitution and the dynamic income effect can make the mere elasticity of substitution an insufficient indicator of the response of the current account to monetary shocks. JEL Classifications (C6, E3, E4)
Keywords: Trade balance | Marshall-Lerner conditions | Elasticity of substitution | Monetary shocks | Transfer problem
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