Working Paper: NBER ID: w0712
Authors: Ben Bernanke
Abstract: This paper examines the relationship between inflation, exchange rates, and the pattern of international trade and payments in a small economy with utility-maximizing agents and a transactions demand for money. Fully anticipated inflation has real effects in the model through its role as a tax on money and thereby on monetary transactions. An increase in the rate of monetary expansion generally reduces the value of domestic output and alters the composition of domestic production. The result is a change in the pattern of international comparative advantage and trade flows. The initial depreciation of the exchange rate following an increase in the rate of monetary expansion is accompanied by a trade surplus and capital outflow, while the subsequent depreciation is accompanied by a trade deficit.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product demand shocks (D12) | productivity (O49) |
| production function shocks (E23) | productivity (O49) |
| labor supply shocks (J20) | productivity (O49) |
| capital cost shocks (G31) | productivity (O49) |
| production function shocks (E23) | output demand (E23) |