The Marshall-Lerner Condition: Stability of an Equilibrium or a System?
This article examines the Marshall-Lerner (ML) condition from a broader perspective. Mundell (1968) regarded ML as the stability condition of the equilibrium, but not of the system. The violation of the ML condition by Japan's estimates is interpreted as a possible symptom of a negative exchang...
Saved in:
| Main Author: | |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
Elsevier
2024-07-01
|
| Series: | Asia and the Global Economy |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S266711152400015X |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| Summary: | This article examines the Marshall-Lerner (ML) condition from a broader perspective. Mundell (1968) regarded ML as the stability condition of the equilibrium, but not of the system. The violation of the ML condition by Japan's estimates is interpreted as a possible symptom of a negative exchange rate depreciation spiral in Thorbecke (2022). By constructing an open-economy macroeconomic model with three endogenous variables in three markets, and solving the model for the exchange rate, we examined the model's stability. Stability depends not only on the ML condition, but also on the configuration of the model's parameters. This implies that the ML condition alone is not responsible for the stability/instability of the model. Using the ML parameter estimated by Thorbecke (2022) and previously obtained money market parameters for the Japanese economy, we found that a simple model satisfies the necessary and sufficient conditions for stability. However, for an extended model, some cases fail to satisfy stability conditions. We further investigate the possible cause of this failure, and suggest that the Bank of Japan's (BOJ) unconventional monetary policies implemented after the economic bubble burst may be responsible. |
|---|---|
| ISSN: | 2667-1115 |