Do recent empirical studies suggest that world elasticity conditions are sufficiently high to permit successful depreciations?
What is meant by the Marshall-Lerner condition? Do recent empirical studies suggest that world elasticity conditions are sufficiently high to permit successful depreciations?
Here is a tip:
Elasticity approach depicts that depreciation favors trade balance when elasticity is high.
According to ML's condition,relation between depreciation and trade balance can be depicted as follows:
Depreciation improves trade-balance if the sum of depreciating nation's import demand elasticity and foreign nation's export demand elasticity exceeds 1.
If sum is less than 1, the balance of trade worsens.
It remains unaffected when it is equal to 1.
Recent empirical studies suggest that demand for most nations are highly elastic in the long-term ,as in a globalized economy multiple options are available for a country to buy products from relatively cheaper markets or replace with domestically produced relatively cheaper imports.
Further a time-dependent study of impact of depreciation on elasticity in the form of J-curve effect. It suggests that in short-run depreciation worsens the trade balance due to inelastic import demand.However in the long run, quantity adjustment effect allows producer to shift their responses(elastic demand),decreasing the volume of imports and increase export competitiveness.Similarly, exchange rate pass through depicts proportion of change in prices in response to change in exchange rate.However, in a global economy the composition of foreign and domestic input used in making a product is akey variable to decide the impact of elasticity on depreciation.
ML's condition depicts the effect of depreciation on an economy based on export and import demand elasticity. Recent empirical studies fulfil the ML'S condition however they also take into account other effects such as J-curve,import composition and exchange rate pass-through.