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Price rigidity, the mark-up, and the dynamics of the current account

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  • Giovanni Lombardo

Abstract

The degree of competition affects the current account response to nominal shocks. The mechanism hinges on the relationship between the mark-up and the degree of real rigidity of prices. In a model with intermediate goods, the degree of real rigidity increases in the mark-up. A weaker response of prices to nominal shocks strengthens the "expenditure switching" effect of the devaluation to the benefit of the current account. We analyse the relationship between the mark-up and the real rigidity in a simple closed economy model and show numerically how the mark-up can affect the response of the current account to monetary shocks in an open economy.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 35 (2002)
Issue (Month): 3 (August)
Pages: 531-555

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Handle: RePEc:cje:issued:v:35:y:2002:i:3:p:531-555

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Cited by:
  1. Giovanni Lombardo, . "Sticky Prices, Markup and the Business Cycle: Some Evidence," Discussion Papers 01/06, Department of Economics, University of York.
  2. Michael Bleaney & Mo Tian, . "Exchange Rates and Trade Balance Adjustment:A Multi-Country Empirical Analysis," Discussion Papers 12/10, University of Nottingham, CREDIT.
  3. Lombardo, Giovanni, 2004. "Inflation targeting rules and welfare in an asymmetric currency area," Discussion Paper Series 1: Economic Studies 2004,04, Deutsche Bundesbank, Research Centre.
  4. Massimo Giuliodori, 2004. "Nominal shocks and the current account: A structural VAR analysis of 14 OECD countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(4), pages 569-591, December.

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