Why a Weaker Currency Might Not Sell More Exports
The textbook story is tidy. The Mundell-Fleming model assumes exporters set prices in their own currency, so a depreciation lowers the price foreign buyers pay, demand rises, and exports recover. Economists call this expenditure-switching toward the depreciating country's goods.
But a lot of global trade is invoiced in US dollars even when neither party is American. If you're buying from one country and selling to another, and the contract is in dollars, then a depreciation of the exporter's currency relative to the importer's doesn't increase the importer's dollar purchasing power — so it doesn't let them buy more. What does help is the importer's currency appreciating against the dollar.
This is the dominant currency pricing framework, and it changes the policy conclusion: the stabilizing feedback loop where weak exports push a currency down and exports bounce back may simply not fire.
AI-generated discussion · Different perspectives
The stakes are bigger than trade arithmetic. If bilateral exchange rates barely move export volumes, then a flexible exchange rate is less of a shock absorber than the traditional model promises.
Worth noting the excerpt only cites reported findings of little pass-through to dollar-denominated export prices — it's summarizing a contested literature, not settling it.