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Current-account effects of a devaluation in an optimizing model with capital accumulation

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  • Nielsen, Soren Bo

Abstract

This article explores the consequences of a devaluation in the context of a ‘real’, optimizing model of a small open economy. What provides for real effects of the devaluation is the existence of nominal wage stickiness during a contract period. We show that if this contract period is relatively short, the devaluation is bound to improve the current account on impact, whereas this will deteriorate in the case of a long contract period, and the more so the smaller are adjustment costs in investment. In addition, we study the consequences for the terms of trade and for the stocks of foreign assets and of capital.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 15 (1991)
Issue (Month): 3 (July)
Pages: 569-588

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Handle: RePEc:eee:dyncon:v:15:y:1991:i:3:p:569-588

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Web page: http://www.elsevier.com/locate/jedc

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Cited by:
  1. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, 02.
  2. Andreas Haufler & Søren Bo Nielsen, . "Dynamic Effects of an Anticipated Switch from Destination- to Origin-Based Commodity Taxation," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 96-16, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  3. Chan, Tze-Haw, 2002. "Dynamic financial linkages among the Asia Pacific economies: an empirical assessment of real interest parity condition," MPRA Paper 34642, University Library of Munich, Germany.
  4. AKITOBY, Bernardin, 1997. "Rigidité normale, dévaluation et équilibre général intertemporel," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9708, Universite de Montreal, Departement de sciences economiques.
  5. Hwan-Chyang Lin & Hui-Kuan Tseng, 1993. "Exchange rate shocks and the current account under monopolistic competition: An intertemporal optimization model," Open Economies Review, Springer, vol. 4(2), pages 133-150, June.

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