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I.     IMMEDIATE EFFECT OF A DEVALUATION ON EXPORTS

 

Assuming for a single commodity i that:

     =   ()      (())

then it can be shown mathematically that for n commodities:

   >   0         iff        ^d   >   1

   <   0         iff        ^d   <   1

   =   0         iff        ^d   =   1

 

II. ROLE OF LIQUIDITY ON EXPORTS IN A DEVALUATION

 

Assuming that:

TR     =   p(, L)        q(p(, L), W(, L), ())

 

Solving for the total differential of the equation, we obtain:

dTR=  [  +  (  +  )] d 

         +      [] dL

          The effect of a devaluation is determined by the first component of the righthand side of the equation above.  We focus on the second component of the righthand side of the equation to analyze the effect of liquidity on exports in a devaluation.  Whether the net effect of liquidity on exports would be positive or negative would be determined by the quantity  [].   We assume  < 0 or that an increase in liquidity leads to a higher foreign currency price of exports and eventually to a decrease in the volume of exports.  Thus, provided that   >  0 or that the increase in liquidity translates into an increase in working capital leading to an increase in the volume of exports, the net effect of an increase in liquidity on exports would be positive if    >   .  Ignoring  for simplicity, this implies that the net effect of liquidity would be positive on exports if   or the positive effect of liquidity on working capital is large enough or if    or the negative effect of liquidity on export competitiveness is low enough. It is reasonable to assume that at some low range of money growth the positive effect of liquidity on  working capital is relatively large compared to its effect on the foreign currency price of exports. Thus, given the tendency for our economic managers to impose a tight monetary policy during a devaluation (as imparted to them by a conventional point of view) then it is reasonable to believe that within some low range of money growth, money growth positively correlates with export growth during a devaluation.