ABSTRACT
One of the best known propositions of international monetary economics is the Marshall/Lerner condition that, for an exchange devaluation to reduce a trade deficit, trade elasticities must be sufficiently high. This chapter is devoted to showing that in a model allowing both trade in goods and services and international borrowing and lending by rational agents, this condition emerges as a requirement of stability. Moreover, if it is not satisfied the system will always move to a region where it is. Hence, it is reasonable to assume that the condition is satisfied in the vicinity of equilibrium and that if it does not hold this will be only a transition phase. Incidentally, if this is the case one of the main reasons for the considerable econometric effort aimed at estimating trade elasticities would not apply.
