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Exchange rate shocks and the current account under monopolistic competition: An intertemporal optimization model

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  • Hwan-Chyang Lin
  • Hui-Kuan Tseng

Abstract

This paper examines the current-account effect of a devaluation in a Chamberlinian model where both saving and investment are based on intertemporal optimization. It shows that devaluation tends to deteriorate the current account along the time horizon, leading to a reduction of the stock of foreign assets permanently. In contrast to recent work, these real effects do not rely on short-run disequilibrium in the goods or labor market. Besides, a temporary devaluation may generate hysteresis effects on both micro- and macro-economic aspects of a small economy. Copyright Kluwer Academic Publishers 1993

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File URL: http://hdl.handle.net/10.1007/BF01000516
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 4 (1993)
Issue (Month): 2 (June)
Pages: 133-150

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Handle: RePEc:kap:openec:v:4:y:1993:i:2:p:133-150

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: devaluation; entry; current account; hysteresis;

References

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  1. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 43-65, February.
  2. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
  3. Nielsen, Soren Bo, 1991. "Current-account effects of a devaluation in an optimizing model with capital accumulation," Journal of Economic Dynamics and Control, Elsevier, vol. 15(3), pages 569-588, July.
  4. LeRoy, Stephen F., 1980. "Entry and equilibrium under adjustment costs," Journal of Economic Theory, Elsevier, vol. 23(3), pages 348-360, December.
  5. Andrew B. Abel & Olivier J. Blanchard, 1982. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
  6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  7. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  8. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  9. Das, Satya P & Niho, Yoshio, 1986. "A Dynamic Analysis of Protection, Market Structure, and Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 513-23, June.
  10. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
  11. Gavin, Michael, 1991. "Tariffs and the current account : On the macroeconomics of commercial policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 27-52.
  12. Robert G. Murphy, 1989. "Stock Prices, Real Exchange Rates, and Optimal Capital Accumulation," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 102-129, March.
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