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By I. Moosa

An excellent consultant with the entire fundamentals to appreciate the various different types of trade fee regimes and the demanding situations they pose to assorted economies.

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13 The effect of devaluation when elasticities are high and low Qx 46 Exchange Rate Regimes than improvement in the current account. 13(d), on the other hand, demand is elastic. Hence, devaluation causes a significant reduction in import expenditure and a rise, not a fall, in export revenue. The result is improvement in the current account. This type of analysis is referred to as the elasticities approach to the balance of payments. The core of this approach is the Marshall–Lerner condition, which tells us that devaluation will have a favourable effect on the current account if the sum of the absolute values of the elasticities of demand for exports and imports is greater than unity.

According to Collier and Joshi (1989), the external balance should be interpreted as the achievement of a sustainable current account deficit (a deficit that is consistent with a realistic medium-run projection of foreign capital inflow). The internal balance is a more complex target as it has The Role of the Exchange Rate in the Economy 33 employment (or output) and inflation as its components. Policy-makers would like to have high employment and output and low inflation, but complications are introduced by the fact that there may be a trade-off between these sub-targets (as implied by the Phillips curve).

09 the gold standard period, the volatilities of the real and nominal exchange rates are very close, indicating indeed that the nominal exchange rate regime is non-neutral as suggested by Mussa (1986). However, the results also support the findings of Grilli and Kaminsky (1991), who argued that the closeness of the volatilities of the nominal and real exchange rates is a post-Second World War phenomenon. Patterns of exchange rate regime choice During the period since 1870, four main exchange rate regime switches have taken place: (i) the adoption of the gold standard from 1870 to the outbreak of the First World War in 1914, (ii) the switch to flexible exchange rates in the interwar period, (iii) the adoption of the Bretton Woods system of fixed but adjustable exchange rates from 1944 to 1972, and (iv) the switch to the present system.

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