Jim, you're forcing me to get technical. (If you can quote pop
songs, so can I: "I wan't to get technical, technical...") What I
meant was this:
XR = f(DM, DX, DDFA, FDDA, RIF-RID, SH, EXP, PDOTF-PDOTD)
where
DM = demand for imports
DX = demand for exports
DDFA = domestic demand for foreign assets
DDA = foreign demand for domestic assets
RIF = foreign real interest rate
RID = real domestic interest rate
SH = safe haven effect
EXP = expectations of all variables
PDOTF = foreign rate of inflation
PDOTD = domestic rate of inflation
The only constraint is that, calculated at actual XR,
DX(XR) - DM(XR) + FDDA(XR) - DDFA(XR) = 0
That is, policy makers are assumed to manipulate XR, RID, and
PDOTD, as well as other factors that in turn determine some of the
other variables above--wage rates, GDP, etc.--so as to leave the
reserve account unchanged.
In general, I argue, it will not be the case that DX(XR) - DI(XR)
= 0. Thus, comparative advantage does not rule.
But if PDOTD rises, PDOTF doesn't, and all other variables remain
constant, my claim is that, under reasonable assumptions concern
ing information and rationality, there will be a corresponding
fall in XR such that real XR remain unchanged.
Hate to spell it out so tediously, but it seems I can't express
myself clearly otherwise. (Formalism is the last refuge of the
inarticulate...)
Peter Dorman
