英语论文网

e last approach of devaluation to trade balance is the monetary approach. Gary A. Craig (1981), on the monetary approach of trade balance emphasized as the balance of payments is determined by the net excess supply or demand for money so does its sub-accounts, in particular the dominant balance of trade account. Further Chau-nan Chen and Tien-wang Tsaur (p, 1149, 1981) argued that the balance of trade 'depends on the aggregate relationship between domestic expenditure and income and does not depend on the composition of expenditure between exportables and importables” the monetary approach to devaluation has two main characteristic, namely; the tight money effect that arises due to decline in the real value of ash balance and

This approach tries to discuss by considering capital movement in its analysis, unlike the elasticity and absorption approach.

Literature survey

The relationship between devaluation, i.e., deterioration of terms of trade has gained attention of many scholars for empirical investigation on trade balance of countries. Accordingly either aggregate data or bilateral data for trade balance has been utilized to see whether the trade balance improves with Marshal-Learner condition in the long run depicting the J curve shape. Findings were not inconclusive in one direction.

Robert W. Gillespie and Philip J. (1973) made analysis on expenditure switching-expenditure reducing approach of currency devaluation and trade balance on 13 developed countries. During the analysis period countries who devalued their currency, such as Canada and France, showed an increase in their domestic resource availability defined as and incurred a trade balance improvement. In contrast, countries that appreciated their currency like, Germany and the Netherlands faced a constant. In the two countries case there was expenditure switching from traded sector to investment sector rather than to consumption.

From the early work of Magee (1973) on elasticity approach of devaluation and trade balance, the US deficit trade balance has not improved regardless the 1971 devaluation of the US dollar. Accordingly adjustment lags such as currency contracts prior to devaluation; post devaluation currency contracts, termed as pass-through and the sluggish quantity adjustment were reasons behind the persistent deteriorating trade balance.

With regard to the first lag, expectation of currency devaluation or appreciation plays a role in contract settlements in the international trade. While a rational exporter prefers payment with an appreciating currency, a rational importer prefers payments settlement with a depreciating one. The currency for contract settlement, therefore; will be determined by export market share dominance in the trading. Hence, a trade balance deteriorates for a currency devaluing country “… the larger the share of import contracts relative to export contracts denominated in foreign currencies…” Bahmani-Oskooee and A. Ratha, p. 1378, 2004).This is a period where immediate post devaluation on worsening trade balance is observed due to earlier import contracts made in foreign currency dominates. The pass-through period is the time for early adjustment of quantity. During this period trade balance worsens as a result of inelastic import demand (delayed consumption pattern from imports to import substitutes) even if faced with higher import pr