Real Exchange Rate and Current Account Dynamics with Sticky Prices and Distortionary Taxes

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Real Exchange Rate and Current Account Dynamics with Sticky Prices and Distortionary Taxes

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Guay C. Lim
Paul D. McNelis

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Abstract

This paper examines the interaction of real exchange rates and current account movements in open economies subject to monopolistic competition with sticky price-setting behavior and distortionary taxes. We find that the correlations between fiscal balances and the current account depend on the elasticity of net exports with respect to the real exchange rate. Under highly elastic export demand, the welfare e¤ects may be greater or lower than under export demand with a low elasticity.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 056.

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Date of creation: Nov 2005
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Handle: RePEc:dnb:dnbwpp:056

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-12-01 (All new papers)
NEP-MAC-2005-12-01 (Macroeconomics)

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