Marshall Lerner Condition for Money Demand

Abstract

This article derives a twofold Marshall Lerner condition for money demand such that the current account may increase or decrease upon respective decrements or increments in the real exchange rate. This is noteworthy because the historic Marshall Lerner condition is such that the current account increases on account of a depreciation in the real exchange rate, yet, the current account also increases if the real exchange rate appreciates: the seeming contradiction is resolved by realizing that the current account respectively increases on account of a fundamental increment in (i) the real money supply and (ii) money demand, which increments respectively affect the real exchange rate in terms of a depreciation and an appreciation, concomitantly. The explanation advanced by the historic Marshall Lerner condition is therefore incomplete or superficial, if not ultimately misleading: the problem is hereby rectified.