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A Stylized Model of the Devaluation-Inflation Spiral (Modèle stylisé de la spirale dévauationinflation) (Un modelo estilizado de la espiral devaluación-inflación

Author(s): Carlos A. Rodriguez
Source: Staff Papers - International Monetary Fund, Vol. 25, No. 1 (Mar., 1978), pp. 76-89
Published by: Palgrave Macmillan Journals on behalf of the International Monetary Fund
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'The transitoryeffectof a devaluationon the balance of paymentsis emphasized in the recentliteratureon the monetaryapproach to the balance of payments. Dornbusch(1973) and Frenkeland Rodriguez(1975).a devaluation tributesto a (transitory) balanceof paymentssurplus.although theexternalsectoris often blamedfortheinflationary outcome.1 the monetizationofwhich.A StylizedModel of the Devaluation-Inflation Spiral CARLOS A. Rodriguez. 76 This content downloaded from 200. In thecontextof themodeldevelopedhere. It isthuspossibletounderstand thereluctance todevalueincountries that.thetiming reservesare "dangerously pricesare "welloutofline"orinternational low. RODRIGUEZ * D oftheresulting balanceofpayEVALUATIONS.fiscal have chosenthewayofperiodicdevaluacorrection.arefrequently mentioned as contributing factors to an inflationary process. and the spiralis themonetization *Mr.themainfuelbehindthe ofthefiscaldeficit and devaluation. Ratherthanresorting butpolitically costly. for example. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions .Aside fromthe directinitialinflationary effectowingto therisein thepricesof tradedgoods(and therepercussionon thepricesofnontraded usuallycongoods).was on leave as a visiting scholar in the Asian Departmentof the Fund when this paper was prepared.further contributes tothesustenance or acceleration oftheinflationary process.havingachieveda stabledomesticpricelevel. to thepermanent.face a persistent balance of paymentsdeficit.141 on Fri. manycountries ofeach beingmarkedbythatpointat whichdomestic tions. In thispaper.49. He is a graduateof the Universityof Chicago.orthemonetization mentssurpluses.Alternative correctivemeasuresrange fromreducing thedegreeofmonetization toobtaining ofthefiscaldeficit externalloans thatmay help to postponethe requiredinflationary adjustment. see." The outcomeof sucha processis a devaluation-inflation spiral withno clearrelation ofcausality.theauthorhas constructed a simplemodelin which toanalyzesomeofthebasicelements ofthedevaluation-inflation spiral.210.itmaybe claimed.associate professorat Columbia University.

141 on Fri. . Givenfullemployment of thefixedfactorendowments. OQT o Oe QH Oe 0 (1') This content downloaded from 200.thereis thetemptation pricelevelhas finally on thedevaluation.STYLIZED MODEL OF DEVALUATION-INFLATION SPIRAL 77 is theonlyalternative subsequentinflation open giventhefiscalconstraint.In theabsenceofa steadyflowofforeign aid thatmatchesthe fiscaldeficit.e. the supply of QH and QT depends on the relativeprice between both E goods. the real exchange rate.Withthepossibility of thedevaluationtakingplace whenthe ofblaming the stabilized.PH.all tradedgoodsare groupedintoa singlecomposite ratesare denotedbyQT and CT.The economyalso producesand consumesa nontraded "homegood" whoseoutputandconsumption ratesareQHandCH and itsprice.49. inflation and attention resulting maybe diverted whichis thefiscal awayfromthemorebasicunderlying disequilibrium.Thus.SectionIII bringsa brief discussionof flexibleexchangerates. I. The domesticpriceof thetradedgood is thenequal to theexchangerate. deficit.E (unitsof domesticcurrency per unitof foreign exchange). themodelgeneratesa devaluation-inflation cycle. PH QT = QT (e) QH = QH (e) (1) and supplyresponsesare assumedto be normal. Basic Structureof Model in Absenceof Fiscal Deficit The economythatis describedhereis smallenoughininternational marketsthatall pricesof tradedgoods are fixedin termsof foreign exchange.thatis. good whoseoutputand consumption thepriceof thetradedgood in termsofforeign exchangeis assumed to equal one. and SectionIV presentsthe conclusions.SectionII incorporates thefiscaldeficitand describesthe devaluation-inflation spiral.devaluationtakingplace at thatpointwhereinternational reservesreacha minimum acceptablelevel even thoughthe pricelevel maythenbe stable. SectionI of thispaperdescribesthe basic structure of the model in theab(a variantof Salter's(1959)traded-nontraded model) goods sence of a fiscaldeficit. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions .210.

141 on Fri. given the fixedM and E at any time. since it increases QT and reduces CT. which.INTERNATIONAL 78 MONETARY FUND STAFF PAPERS The author has abstained fromthe dynamic considerationsof investmentand capital accumulation and has assumed that domestic money. and its rateofchange (in theabsence of capital flows)equals theexcess supplyof tradedgoods (the balance of trade paymentssurplus): dR = dt = QT (e) . furthermore. is the only store of value available to domesticresidents. demands are given by CT= CT (e. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions . a higherstock of real cash balances--mincreases CH and requires a higherrelativeprice of home goods-a lower e-to clear the market. m) (3) It follows fromthe signs assumed in equations (1') and (2') that a highere improvesthe tradebalance. m) (4) As shown in Figure 1. since as consumptionincreases.210. imply opposite movementsin e and m: QH (e) = CH (e. Om (2') The stock of internationalreserves held by the central bank is R. while a higherm deterioratesthe trade balance. for the marketequilibriumfor This content downloaded from 200.Choosingthenominal price of the home good as the deflatorfornominalvariables. m) CH = CH (e. this is achieved throughmovementsin the domesticnominalprice of home goods." so that demands must be homogeneousof degreezero in all nominalquantities. PH. CT Oe OCH m >0 Am >CT0 .M.CT (e. Marketequilibriumforhomegoods is assumed to prevailat all times. Demand fortradedand home goods depends on the nominalprices the author of both goods and the nominalmoney stock. the exportsurplusis reduced. Thus. has assumed away "money illusion.49. m) (2) where m= M PH CH and CT are assumed to change withe and m accordingto OCH de >0.

mo) CH e.we can substitute it in to obtain the in a of equation(3) change reservesonlyas function the realexchangerate: R = f(e)-QT(e) where OQT ae .STYLIZED MODEL OF DEVALUATION-INFLATION 79 SPIRAL e CHfe.e mustsatisfy R =f(e) = 0 Associatedwithe.that marketequilibrium forhomegoods: guarantees m = H (e) This content downloaded from 200.Denotethereducedform m between and e that thehomegoodsmarket so clearsby relationship m = H (e).H(e)] (6) OCr OCT Oe Om The authorhas assumedthatthereis some value of e such thatthe excess supplyoftradedgoodsis zero. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions . H' (e)< O (5) Since equation(5) mustprevailat all times.210. R is notchanging.141 on Fri.CT[e.CH FIGURE I homegoods.e and m are inversely related.49. Denotinge as thatvalueoftherealexchangerate. thatis. thereis a level of real cash balances.rm.m1>mo) / eO el _ __ __ _ _ / _ _ I QH(e) QH.

e.49. unchanged.210. A moredetailedanalysisof thedynamicadjustment of theeconomy follows.141 on Fri. theline0 E0 showsthepreEo vailingmleratioat timeto. orm tochange.thenominalexchangerate.In Figure2.increasing supplyofhomegoodsthatis corrected through bothm and e and thusmovingtheequilibrium pointtowarda. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions . E = f (e) Thus. At any instant. of course. thenominalmoneystock increasesby the value of foreign exchangepurchasesby thecentral bank: M = E R.INTERNATIONAL 80 MONETARY FUND STAFF PAPERS If the onlysourceof moneycreationis reservepurchasesby the centralbank. In theabsenceofdomesticcreditcreation. Eo belowa wouldimplyan excess Eo a lowerPH. The verticallineat e = e represents M= = 0.giventhenominalmoneystockM(to)and is thenattainedat the(fixed)exchangerateE0o. theonlylevelofe forwhich (5).at pointa.Thedownof m and e for wardslopingscheduleHH shows the combinations as in equation(4) or whichthehomegoods marketis in equilibrium.itis clearthatmh ande arethelong-run values equilibrium fore andm. it followsthatat any instantthe ratiom/eis e a predetermined variable.although timeitchangesaccording through tion (7). thebalanceof This content downloaded from 200. or.sincewhene equalse.Short-run equilibrium theintersection of the0 ?) linewiththeHH schedule. Figure2 describesthedynamicbehavioroftheeconomy. thenominalmoneysupplyremains andthusthereis noreasonforeither PH. as is. Corto theinitialratioM(to)aretheshort-run values equilibrium responding Anypointon thefeasiblelocus0 Eo m(to)and e(to). using equation (6).thus.- (7) orlessthanzeroas thebalanceofpayments willbe greater is in surplusor deficit.Sincee(to)is shownto be less thane.theratioMIE toequais fixedatanytime. Since MIE -.the nominalmoneystockis a predetermined variable.

210.141 on whichpointexternal balanceis attained. requiring in thebalanceof The fallin bothPH andM worktowarda reduction of tradedgoodsis decreasedwhile deficit.49.andthustheshort-run equilibrium position Eo movessoutheastalongHH untile is thatR and M are consumption payments remainsin increases.STYLIZED SPIRAL MODEL OF DEVALUATION-INFLATION 81 m M(to) Eo mfto) - --- - ^^ / ~~0 ~ e(to) ^HH e FIGURE 2 paymentsis in deficit.Starting thatthe balanceof paymentsis in deficit. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions .As longas thebalanceof payments production This content downloaded from 200.the M(t) linerotatesclockwise.the subsequentfallin M owingto reservelosses decreasesthedemandforhomegoods. equilibrium oftheadjustment and moreintuitive An alternative proexplanation withan initialstockofcash balancessuch cess is as thatthemoneysupplyremainsunchanged and themotionoftheM(t) linestopsas thesystemreachesitssteadystate Eo withexternalbalancean(l pricestability.thus a lowernominalpriceof homegoods to clearthatmarket.As M falls.

210. so thatequation (9) becomes ME=R + go (10) We mustnowaccountforthefactthattherateofchangein reserves equals the privatesector's excess supplyof tradedgoods-equation(6)-minus therateofgovernment purchasesoftradedgoods(go). yieldbalanceofpayments achieved.a real exchangerate higherthane is requiredin orderto inducea positiveexcess supply demand. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions . equation(11)inequation(10). supplychangesaccordingto M = ER + D (8) Dividingequation(8) byE M *D -R/ +-- (9) NoticethatDIE is therateof government spendingon tradedgoods (DIE = go). and creditto the government.oftradedgoodsperunitoftime.49. so that R (11) =f(e)-gO fromwhich.R. equilibrium. Structureof Model withFiscal Deficitand Descriptionof Devaluation-Inflation Spiral to purchasea fixed is committed Assumenowthatthegovernment amount. tendsto remainstableas externalbalanceis finally II.INTERNATIONAL 82 MONETARY FUND STAFF PAPERS M andPH keepfalling timeandthebalanceofpayments deficit.141 on Fri. keepsimproving. e mustbe largerthane (e being such thatf (e) = 0). andthusPH. at whichpointM. The nominalmoney followsthatforR to equal zero.and thatthosepurchases thatthegovernment arefinanced centralbankcredit(assuming through purchasesofhomegoodswouldnotchangeanyofthebasicconclusions of the model). go. necessarily.Thereare now two sourcesof monetary expansion: D.we obtainthefinalexpresSubstituting sionforthechangein thenominalmoneystock: This content downloaded from 200. oftradedgoodsbytheprivatesectorto matchthegovernment = = Let e denote thatlevel of e forwhichR f (e) go 0. through M and PH fallto a levellow enoughto eventually.

At the instantof the change.141 on Fri. the R = 0 line shiftsto the rightup to e = e. With the introductionof a positive rate of government spending. for M/E to equal zero. Therefore.go = 0. were zero.theeconomy for at at whichbothR and M was its steady state equilibrium pointa.price stability)is smallerthanthe one requiredforexternalbalance. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions .STYLIZED E MODEL OF DEVALUATION-INFLATION 83 SPIRAL -f(e) (12) Thus. such that f (e) .49. (Since This content downloaded from 200. as all of the governmentdeficitis financedwithreservelosses. e must equal e. nothinghappens withe and m.go. M=0 R=O M(to) Eo Mfto) E1 . HH e e FIGURE 3 Beforetheintroduction ofthedeficit-financed spending. Neitherthe marketequilibriumscheduleforhomegoods nor the 3M = 0 schedule is affectedby the new rate of government spending. e: price stabilitycan be achieved only at the expense of a continuous balance of paymentsdeficit.the level of the real exchange ratethatis consistentwitha stable moneystock(and thus.Figure 3 describes the dynamic behavior of the economy.210. given a positive level of deficit-financed governmentspendingon tradedgoods.

ofgovernment on tradedgoodsdoesnothave theintroduction spending an instantaneous inflationary impacton thepricesofhomegoods.210. on thattheimpact effectof thedevaluationis to increasethelevelof therealexchange rate. Assumealso thatthereis a minimum acceptablereservelevel(Rm)at whichthecentralbankhas to takecorrective action. devaluationwillbe aimedat yieldingpreciselyexternalbalance.thereis thusa potential excess a higher demandinthehomegoodsmarket thatis clearedthrough PH.while fromtheproduction thedemandforhomegoodsis increased. PHmustrisebutin a smallerproportion in E. suchthate remainedunchanged. the balance of paymentsis in deficit. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions . Real cash predevaluation balances.)Thus.Ra.The authorhas thusassumedthatthecentralbankwoulddevaluesufficiently to generatea periodof balanceofpaymentssurplusesthatwouldbringthe stockofreservesbackto theaverageacceptablelevel.141 on Fri. thepriceof homegoods wereto increasein thesameproportion.84 INTERNATIONAL MONETARY FUND STAFF PAPERS e = e is now less thane. Assumenow thatin theinitialsituation international reserveswere at a level(Ra) thatwas judgedto be an acceptablelong-run average. thesystemremains at pointa whilereservesare running motionless down. itis notsensibleto assumethatthe Furthermore.theonlycorrective actionleftto the foreign bankis devaluation. Goingback to Figure3.because in thatcase reserveswouldbe stabilizedonlyfora moment: sincethemoneysupplykeepsincreasing on accountofdomesticcredit wouldturnintodeficit reserve all theexcess demandfortradedgoodsis equilibrated through losses. aftertheincreaseing.mustbe lower.eventhough e is unchanged.Assumingthat the fiscaldeficitcannotbe removedand thata permanent inflowof aid cannotbe obtained.a devaluation takesplace.however. The increasein thenominalpriceof homegoods must. increasethepriceoftradedgoods.thebalanceofpayments immediately afterward andthusreserveswouldfallagainbelowRm. It followsthat. Attheprevailing the the devaluation is to for home immediate effect of price goods.sincePHhas risenandthusCH must havefallen. both abstaining supplyofanddemandforhomegoodswouldthenremainat theirsame levels (since e would thenbe the same).afterthe thantheincrease devaluation. fromanyrealcash balanceseffect. theremustthenbe an excess supplyofhomegoodscallingfora smallerthantherisein thenominalexchangerate.To see this.andthusresourcesareshifted away of homegoods intothatof tradedgoods.whenRa-Rm nominal ofreservesis lost.thehigher Followingtheimpacteffect This content downloaded from 200.49.assumethatin responseto theriseinE.

thereis no tendency andfalling exchangeratetochange.The impacteffect ofthe devaluation is toreducerealcashbalances.WithM forthepriceofhomegoodsor thereal stabilized.thatsincee has increaseinPH mustbe less thanthatofthe increased.The risingPH.andthustheinitialresource shifttowardthetradedsectoris slowlyreversed.As M increases deficitand the monetization a time.and theequilibrium pointshiftsalongHH fromb towardc.however. the moneysupplyincreasesbecause of bothreservepurchasesand domesticcreditcreation. whichhas to be largerthane in order forthebalanceofpayments to be in surplus.m riseswhilee falls.210.andthusa periodofpricestability reservesis reached. as Followingtheimpacteffect. inturn. the nominalpriceof homegoods continues andas therealexchangeratestillfalls.141 on Fri. the This content downloaded from 200.Thus.however.The previously stablemoneysupply thefiscal nowstartsrisingon accountofbothcreditcreationtofinance of the reserveinflow.impliesa falling realexchangerate.and themoneysupplystopsrising. theimpacteffectofthedevaluation is to shift stillrisingowingto thedomesticcreditcreation to financethe fiscaldeficit. so thattheMIE line shiftscounterclockwise.Eventually. owing expansionary moneysupplykeepsrising.Given thefixednominalexchangerateE = E1.requiring through risingnominalpriceofhomegoodsto clearthemarket.andthisis achievedthrough a jumpin thepriceof homegoods. notice. In termsof Figure3.thecontractionary effects on themoneysupplyofthereservelosses are notenoughto offset the effects to domestic credit so that the creation. Duringthistransitional period. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions . thebalanceofpayments itreaches deficit growslargeruntileventually a levelforwhichthevalue of reservelosses preciselyequals thatof domesticcreditcreation.thebalance increasing.the moneystockstartsincreasing.afteran initialperiodofpricestability.linefrom to and therealexchange instantaneously.andreserves as externalbalanceis achieved. E Eo El rateis increasedfrome to e1.Therefore.STYLIZED MODEL OF DEVALUATION-INFLATION SPIRAL 85 real exchangerateinducedby thedevaluationis assumedto turnthe balanceofpayments intosurplus.thedemandforhomegoodsalso increases.Thus. the in outcomeof devaluationis an instantaneous jump thepricesof homegoods followedby a smoothrateof increase. of payments turnsintodeficit.49.For a while.As timepasses.However. e1 > e.The nominalmoney stop increasing supply. thefalline is due to a rising the priceofhomegoods.theproportional M andPH go on increasing. thereductionintherealexchangerateandtheaccumulation ofcashbalances is enoughto eliminate theexcesssupplyoftradedgoods.

In thetransition the moneystockkeepsgrowingas domesticcreditcreationexceeds the value of reservelosses.210. e. therateofmonetary expansionmustexceedthat in thepricesof homegoods (whichin turnis largerthan of inflation thatof theoverallpricelevel. (3) a positive butdecelerating inflation shiftsbackfromb to rate. In thisdevaluation-inflation cycle.althougheventually as reserveshitRmand thecyclestartsagain. PH mustkeep also do thesystemrestsat a whiledecumulating reserves.the nominalmoneystockstabilizes.49.86 INTERNATIONAL MONETARY FUND STAFF PAPERS to blame the devaluationforthe subsequentinflation is temptation almostunavoidable.on thetypicalcycle go~ AD E AM E AM M M ME E This content downloaded from 200. As e keepsfalling. pointkeepsmovingalongHH towarda.thus. rateof expansion. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions .all the increasein thenominalmoneysupplymustbe due to domesticcredit creation.and.giventhe structural balanceprovidedby thefiscalconstraint. andPH. PH Figure4 theequilibrium pointmovesfroma to b.another periodofpricestability a new devaluationwillbe necessary the equilibrium (2) a positivebut decelerating movesfromb to a. withthetroughs International reservesfollowa cyclicalpattern being reachedwhendevaluations takeplaceand thepeakswhentheequilibriumpathreachespointc alongHH.thepriceof homegoodsexperiences threedistinct phases:(1) a stableperiod. inflation ratethat. Sincem is also rising.will equal the averagerateof monetary expansionforthe theequilibrium a along actionsdo notcontribute to themoneysupply(at thegivenexchange ratereservesare builtup fromRmto Ra and thenlostagain).Sinceoverthetypicalcycle. the balanceof paymentsturnsagainintodeficitand theequilibrium fromc toa. If therateof devaluation was properly chosen. as pointa is reachedagain.on average.sincethepricesof tradedgoodsremain constant).reservesmusthave reachedthetargetlevelRa whentheturning pointc is reached.141 on Fri.At c. Even though thesystemhas a built-in has thesystemrestsat pointa.Eventuallye fallsenoughso thatthebalanceofpayments deficitequals the rateof domesticcreditcreation.althoughcarefulanalysisshowsthatthe devalimuationwas theonlycorrective measureleft.(2) a jump at the momentof thedevaluation. The nominalmoneystockfollows twophases:(1) a stablemoneysupply.

3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions .141 on Fri. Tr.210. giventhefiscalconstraint.equals the average rateof monetaryexpansion over the cycle. The average inflationrate in the prices of home goods and of tradedgoods.49.the objectives of external balance and price stabilityare incompatiblewitheach otherunder a fixed exchange rate. The nominal This content downloaded from 200. Flexible Exchange Rates As we have the average value of real cash balances in termsof traded goods. so that 7T = go/mT III. The resultis a series of periods of balance of paymentscrisisand devaluationsfollowedby risingprices.STYLIZED MODEL OF DEVALUATION-INFLATION 87 SPIRAL time FIGURE 4 AM so that-- = go/mT M where mT = .

thesignalforthedevaluation can stillbe givenby thelevelofreserves.SinceR = 0 atall times. orderly thera stablenora smoothpathofpricesis achievedunderfixedrates. theeconomymovesalongthe and stagesofthetypicalcycle.theauthorhas developeda simplemodelto analyze someoftheessentialelementsoftheinflation-devaluation spiralinthe of a real creation deficit credit financed presence government through the He the central bank. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions .whichis determined entirely by domesticcreditcreationto financethe fiscaldeficit.In successiveperiodsofpricestability external devaluation followedbyinflation andexternalsurplus. Conclusions In thispaper.the conclusionthattheexternalsectoris thecause of theinflation would be inappropriate.and thatthelikelyoutcome. is notconduciveto an an outcomethatcertainly neiand efficient allocationofresources.Whilecasualobdecelerating servation wouldindicatethatinflation is beingprecededbydevaluation and monetization of theresulting balanceofpayments surpluses.49. the externalsectordoes not contribute at all to money creationover the wholeof the typicalcycle. This content downloaded from 200. and finally inflation andexternaldeficit. sincethesize of theexchangeadjustment and thelengthof thetypicalcycle vary withthedifference betweenR. has shown that those circumstances under by of are and balance inconexternal objectives pricestability mutually sistent. and a freefloating or crawlingpeg systemmaybe preferable.thecentralbankabstainsfromintervening and thenominalexchangeratewilladjustso foreign exchangemarket.butin orderto reducethesize ofexchangerateadjustment.m directly IV.141 on Fri. deficit.88 INTERNATIONAL MONETARY FUND STAFF PAPERS suddenjumps. thatexternal balanceis continuously achieved. theeconomywillalwaysbe atpointc inFigure3 withtherealexchange rateat thelevele and inflation proceedingat thestablerate T =g- mT An alternative to a freelyfloating rateis a crawling peg withperiodic butsmalldevaluations. it is correctthatovera shortperiodfolAlthough lead the movelowingthedevaluationexternalsectordevelopments mentin domesticprices.210.(As we saw in SectionII.) Once thepropertime itfollowsclearlythatthepriceleveland the dimension is recognized.over theentiretypicalcyclethepricelevel followsthepathofthemoneysupply. priceof homegoodsgoes through phasesof stability. and steadyinflation. theminimum acceptablelevelRmshould be putas close as necessaryto theacceptablelevelRa. In thiscase. Under thefloating in the system.

. E. Rodriguez.STYLIZED MODEL OF DEVALUATION-INFLATION SPIRAL 89 exchangerateare endogenousvariableswithno directcausalityrelationsbetweenthem.whichareinturndetermined oftheinternal bythemonetization fiscaldeficit. Vol. Vol. G. 674-88.141 on Fri. 65 (September1975). Salter. 226-38. 81 (July/August 1973).210. 3 Oct 2014 23:04:56 PM All use subject to JSTOR Terms and Conditions . Jacob A." AmericanEconomic Review."CurrencyDepreciation."Economic Record." Journal of Political Economy. pp. 893-915. Frenkel. W. REFERENCES Dornbusch.. 35 (August 1959).bothbeingled by developments in themonetary sector. pp.and Relative Prices. "Internal and External Balance: The Role of Price and Expenditure Effects. Vol. This content downloaded from 200.Rudiger.Hoarding.49. "Portfolio Equilibriumand the Balance of Payments:A MonetaryApproach. and Carlos A. pp.