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The elasticities approach in general equilibrium: Real shock dynamics

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Abstract

This paper constructs a general equilibrium model that embodies: the elasticities approach to the trade balance in the long run, but allows for inelastic short run demand; and an asset market approach to the capital account, with uncovered interest parity and consistent expectations.

Two policies are examined: increased government expenditure and an increased import tariff. The effects of these policies on net exports, the exchange rate, and other variables are determined. A phase diagram demonstrates the dynamic adjustment paths of the exchange rate and the trade balance, and provides a general equilibrium explanation for overshooting and the J-curve as a result of real shocks. Extensions are made to account for policy pre-announcement, the Laursen-Metzler effect, and large-country effects.

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Authors and Affiliations

  1. Temple University, Japan

    Daniel J. Ryan

Authors
  1. Daniel J. Ryan
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Ryan, D.J. The elasticities approach in general equilibrium: Real shock dynamics. Atlantic Economic Journal 21, 22–38 (1993). https://doi.org/10.1007/BF02302326

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  • DOI: https://doi.org/10.1007/BF02302326

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