Abstract
In past years a large number of papers have appeared that extend the familiar IS-LM model to a macro analysis for open economies. The two interesting issues in these writings are (1) macro theory of devaluation under fixed exchange rates, and (2) monetary growth theory under flexible exchange rates. Devaluation theory is based on a static macroeconomic framework. A type of theorem in this context, as the Meada-Tsiang model had shown, is that a devaluation is expansionary (deflationary), if it improves (worsens) the trade balance. Recently, Cooper studied two dozen countries' devaluation experiences and found that for a hypothetical 'representative' country devaluation may improve the trade balance, stimulate price increases and depress domestic economic activity. This finding is sharply contrary to that of the conventional one. It is necessary to modify the conventional approach, if these empirical results are to be explained. The first part of this study will seek to set up a short-run macroeconomic model to resolve the Cooper paradox. First, we will present a familiar open economy IS-LM model with price-flexibility-variable-output. Within this framework, we can consider the monetary and wage effects of devaluation explicitly and resolve the Cooper paradox (A): a devaluation may improve the trade balance, but depress the domestic economy; and the Cooper paradox (B): a devaluation may improve the trade balance, stimulate price increases, but depress the domestic economy. On the other hand, the monetary growth theory is based on a dynamic macroeconomic framework. Mainly, this theory is to extend the familiar Tobin neoclassical monetary growth model to open economies. The pioneering analysis by Allen for a complete specialization two-country monetary economy is followed by the interesting works by Harkness for a one-sector three-asset small open economy and by Ramanathan for a two-sector two-asset small open economy. One of the interesting consequences of their analysis is that in the open economy the relationship between the rate of monetary expansion and long-run capital intensity may or may not be the same as that in a closed economy...
Shieh, Yeung-nan (1980). Essays in international macroeconomics. Texas A&M University. Texas A&M University. Libraries. Available electronically from
https : / /hdl .handle .net /1969 .1 /DISSERTATIONS -661700.