Devaluation, Wealth Effects, and Relative Prices
Is Version Of
The emergence of the portfolio balance approach 1 has led to a reformulation of the causes of balance-of-trade and payments disequilibria. According to this approach, balance-of-trade deficits and surpluses reflect discrepancies between desired and actual wealth holdings; while balance-of payments deficits and surpluses reflect discrepancies between desired and actual money holdings. Thus, balance-of-trade and payments disequilibria are viewed as representing disequilibria within the asset markets. Using this framework several authors2 have examined the self-correcting nature of disequilibria within the balance of-payments accounts and the ability of a devaluation to reduce the magnitude of a disequilibrium.
This is an article from The American Economic Review 68 (1978): 601. Posted with permission.