I can’t figure out how debasing your currency helps exports. Here’s an example: Suppose that the US and Canadian dollars are one to one. If a Canadian wanted to buy a six pack from the US he could exchange 5 Canadian dollars for 5 US dollars and buy the six pack for 5 US dollars. Now suppose the US…

My answer would be that inflation causes the currency to devalue more quickly than it causes prices to increase. Newly crated money isn’t directly released into the hands of the beer-buying public. A lot of it goes to financial instruments where it’s just a number in a computer and into the hands of…

Your model is assuming that the nominal price inflation/deflation that occurs as a result of artificial manipulation of the money supply would be instantaneous and that no income/substitution effects would occur. Assuming a lag time between monetary expansion and rising prices, if you one day woke u…

Well, if a producer makes six packs in both Canada and United States - and the costs to producing them are exactly equal. Then let’s say the U.S. dollar is devalued by 50% vs the Canadian dollar - then there is an argument that the costs to produce the six pack in the United States will now be chea…

I can see exports getting cheaper if there is a lag between the currency exchange rate changing and the price changing. But I also would expect this to be temporary. Eventually if you double the money supply, I think you will double everything, the exchange rate and the final price. Also screwing ar…

The answer is that exchange rates not only depend on the money supply of a country, they are determined by the demand for that currency by other countries. To buy a countries exports other countries need that countries currency, and if there is more demand for a currency it’s price will go up. …

EmperorNero: Suppose there are only 2 countries in the world, Canada and the US. Suppose they both allow their currencies to float freely and the result is a one to one exchange rate. If the US then doubles its money supply I’m willing to bet that the exchange rate between the 2 countries will even…

That’s true. But I think you asked why an artificial debasement of the currency would have effects on exports. The suggestion being that price increases would negate any debasement of the currency. The answer to your question is, I think, that exchange rates are not just determined by the money supp…

EmperorNero, The more I think about this the less sense is makes that artificially debasing your currency would help exports. It seems like it will actually do the opposite if you follow Milton Friedman’s logic. Go back to my Canada-US example where Canada and the US are the only 2 countries in exi…

EmperorNero, Just to add to your demand-side analysis, that is why lower individual, capital, and corporate taxes can also increase the value of a currency. Lower taxes on income in one country will act an an incentive for individuals to invest more in that country. Take the US and Canada as an exa…

How does debasing your currency help exports?

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Catalan February 2, 2011, 2:03pm 2

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How does debasing your currency help exports?

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