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Current Account and Exchange Rate Dynamics

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  • Lilia Cavallari

Abstract

type="main" xml:lang="en"> The theoretical part of this paper analyses the positive and normative effects of a surprise monetary expansion in a small open economy characterized by imperfect competition and short-run price rigidity in the domestic sector. The temporary output boom fostered by the monetary expansion is shown to come at the cost of a permanent squeeze of the domestic sector. This affects welfare ambiguously, as the overall welfare consequences of the monetary expansion may eventually turn negative for a critical value of external assets. The empirical part of the paper provides evidence in favour of a key role of monetary shocks in driving current account fluctuations in seven major industrialized countries. (J.E.L.: E61, F41).

Suggested Citation

  • Lilia Cavallari, 2001. "Current Account and Exchange Rate Dynamics," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(1), pages 27-51, February.
    • Handle: RePEc:bla:ecnote:v:30:y:2001:i:1:p:27-51
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    References listed on IDEAS

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    1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    2. Richard H. Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
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    5. Laurence Ball & David Romer, 1990. "Real Rigidities and the Non-Neutrality of Money," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 183-203.
    6. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 421-445.
    7. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
    8. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche 9614, Universite de Montreal, Departement de sciences economiques.
    9. Paul R. Bergin, "undated". "Monetary Policy, Investment Dynamics, And The Intertemporal Approach To The Current Account," Department of Economics 97-13, California Davis - Department of Economics.
    10. Jaewoo Lee & Menzie D. Chinn, 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," NBER Working Papers 6495, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Massimo Giuliodori, "undated". "The Empirical Relevance of a basic sticky-price intertemporal model," Working Papers 2001_17, Business School - Economics, University of Glasgow.
    2. Darius, Reginald, 2010. "The macroeconomic effects of monetary and fiscal policy in a small open economy: Does the exchange rate regime matter?," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1508-1528, December.
    3. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    4. Gil Kim & Lian An & Yoonbai Kim, 2012. "The behaviour of the real exchange rate and current account," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 5(2), pages 139-160, December.
    5. Thomas Lubik, 2003. "Industrial Structure and Monetary Policy in a Small Open Economy," Economics Working Paper Archive 493, The Johns Hopkins University,Department of Economics.
    6. Zoë Venter, 2020. "The Interaction Between Conventional Monetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 521-554, September.

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    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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