Currency Depreciation, Hoarding, and Relative Prices

Abstract

This paper investigates the effects of devaluation in a two-commodity, two- country, and two-money model with full employment and price flexibility. Primary emphasis is placed on the effect of a change in the real value of money on real expenditure and on the effects on relative prices of a redistribution of expenditure between countries. The stability properties of the model are related to the transfer problem in barter theory and to the Marshall-Lerner condition. Given stability, it is shown that a devaluation will improve the balance of payments.