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Monetary Policy, Investment Dynamics, And The Intertemporal Approach To The Current Account

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  • Paul R. Bergin

Abstract

This paper applies the intertemporal approach to the current account to the case of monetary shocks. A two-country dynamic general equilibrium model with predetermined wages is proposed as a means to bridge the gap between Mundell-Fleming and modern intertemporal models. Early versions of Mundell-Fleming implied that a monetary expansion must necessarily improve the current account; the alternative result became a possibility in more contemporary versions when intertemporal features were introduced into the asset market. The present model suggests that when intertemporal features are also introduced into the other markets of the economy, the model's prediction is transformed yet further. A calibrated version of the model suggests a beggar-thy-neighbor improvement in the current account becomes unlikely for reasonable parameter values.

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Paper provided by California Davis - Department of Economics in its series Department of Economics with number 97-13.

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Handle: RePEc:fth:caldec:97-13

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Postal: University of California Davis - Department of Economics. One Shields Ave., California 95616-8578
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Cited by:
  1. Fabio Ghironi, 2000. "Towards New Open Economy Macroeconometrics," Boston College Working Papers in Economics 469, Boston College Department of Economics.
  2. J. Andrés & J.D. López-Salido & J. Vallés, . "The liquidy effect in a small open economy model," Studies on the Spanish Economy 21, FEDEA.
  3. Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics 466, Boston College Department of Economics, revised 30 Oct 2000.
  4. Fabio Ghironi, 2000. "Understanding Macroeconomic Interdependence: Do We Really Need to Shut Off the Current Account?," Boston College Working Papers in Economics 465, Boston College Department of Economics, revised 14 Aug 2003.

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