Does it reflate economies if all nations increase their exports?

The Germans lecture the periphery to engage in structural reform and increase their exports.  A variety of IS-LM Keynesians strike back and note that not all nations can increase their net exports, therefore it is a kind of zero-sum game which won’t boost aggregate demand overall.  This is sometimes followed by blaming the Germans for soaking up aggregate demand from other parts of the world.

But that Keynesian counter is a mistake, perhaps brought on by the IS-LM model and its impoverished treatment of banking and credit.

Let’s say all nations could indeed increase their gross exports, although of course the sum of net exports could not go up.  The first effect is that small- and medium-sized enterprises would be more profitable in the currently troubled economies.  They would receive more credit and the broader monetary aggregates would go up in those countries, reflating their economies.  (Price level integration is not so tight in these cases, furthermore much of the reflation could operate through q’s rather than p’s.)  It sometimes feels like the IS-LM users have a mercantilist gold standard model, where the commodity base money can only be shuffled around in zero-sum fashion and not much more can happen in a positive direction.

Second, the higher (gross) exports and higher quantity of trade overall would produce positive wealth effects.  This too would reflate economies through a variety of well-known mechanisms, including but not restricted to the easing of collateral constraints.

In other words, it can help reflate all or most of the economies if they increase their gross exports, even though net exports are a zero-sum magnitude.

This interpretation of the meaning of zero-sum net exports is one of the most common economic mistakes you will hear from serious economists in the blogosphere, and yet it is often presented dogmatically or dismissively in a single sentence, without much consideration of more complex or more realistic scenarios.

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