Prosperity and Depression.pdf

Chap. I?, International Aspects of Business Cyc/es 439Again, it '\\Till be expansionary \vhen it corrects an " over-valuation"of the depreciated, and an "under-valuation" of the appreciated,currency : it will be deflationary when such a disparity isaccentuated. l The criterion of over-and under-valuation isthe divergence from the equilibrium level as defined above. 2Naturally, the devaluation may be so strong as to create a disparityin the opposite sense. It is common knowledge that this has infact frequendy occurred.It is much more difficult to say anything definite on the worldeffect, so far. as the influence on the demand for· investible fundsis concerned. In the D country, owing to the encouragement ofeAl'0rts and discouragem~t of imports, the demand for investmentfunds will be stimulated. In the A countries, the demandwill be unfavourably influenced, even if (owing to the existence ofample reserves) the supply of investible funds is not affected at all.It is impossible to say whether the expansionary effect in D or thedeflationary effect in A will be stronger. Much will depend oncertain lags. If, for example, a cumulati-ve expansion process inD has time to develop before a contraction in A has got underway, it will- have favourable repercussions on A, so that A maybe relieved from the initial pressure produced by the devaluation.It is, however, probable that the total result willEffect on be decisi'lely influenced by other factors to which wecapital must tum now. We are thinking of the influencesmovements. which a variation in the exchange rate may exertthrough capital movements and possibly through" psychology ". (In practice, there are, of course, still otherfactors to be considered-viz., the probability of retaliatorymeasures in the sphere of eurrency manipulation or of commercialpolicy. There is also the effect on the international economicpolicy of the D country itself to be considered. The devaluationmay enable a country to relax impediments to international1 Compare P. B. Whale: "The Theory of International Trade in theAbsence of an International Standard" in Economica, London, February1936, pages 33 and 34, for a discussion of the terms" over-valuation ttand U under-valuation", and Harris, Zoc. cit., passim.I Measurements of U purchasing-power-parity" based on comparisonsof price levels or of changes in price levels in both countries afiord onlyvery rough and unreliable criteria of over- and under-valuation.