New Marshall-Lerner conditions for an economy with outward and two-way foreign direct investment

The international debate about trade imbalances often puts the focus on the role of domestic GDP/foreign GDP and the role of real exchange rate changes – with respect to the latter adjustment channel, the standard question is whether or not the Marshall-Lerner condition is fulfilled. While recent tr...

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Bibliographic Details
Published in:International economics and economic policy 2019-10, Vol.16 (4), p.593-617
Main Author: Welfens, Paul J. J.
Format: Article
Language:English
Subjects:
Economic aspects
Economic models
Economic Policy
Economics
Economics and Finance
Foreign exchange
Foreign exchange rates
Foreign investment
Foreign investments
Foreign policy
GDP
Globalization
Gross Domestic Product
International cooperation
International Economics
International trade
Macroeconomics/Monetary Economics//Financial Economics
National income
Original Paper
Policy making
Prices and rates
Public Finance
Purchasing power parity
Research methodology
Trade policy
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Summary:The international debate about trade imbalances often puts the focus on the role of domestic GDP/foreign GDP and the role of real exchange rate changes – with respect to the latter adjustment channel, the standard question is whether or not the Marshall-Lerner condition is fulfilled. While recent trade literature has focused on exchange rate pass-through the role of FDI has not been much discussed. With outward foreign direct investment (FDI) and inward FDI becoming increasingly important, the question about the real exchange rate impact on the trade balance has to be restated as imports are proportionate to real gross national income and this indeed implies a new Marshall-Lerner condition. It is shown that with outward cumulated FDI, the modified condition is stricter than the traditional case and with both outward FDI and inward FDI, the elasticity requirement is ambiguous. “FDI globalization” might go along with unpleasant trade imbalance problems so that additional empirical research is needed as well as stronger international policy cooperation as high trade balance deficits/high trade balance surplus positions could be rather difficult to correct through exchange rate adjustments only. Looking at the import elasticities for all partner countries of the US – or country x – together is quite misleading for policymakers.
ISSN:1612-4804
1612-4812
DOI:10.1007/s10368-019-00450-5