On the Trade Balance Response to Monetary Shocks: the Marshall-Lerner Conditions Reconsidered

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.Trade Balance, Marshall-Lerner Conditions, Elasticity of Substitution, Monetary Shocks, Transfer Problem