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Current Account Effects of a Devaluation in an Optimizing Model with Capital Accumulation

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Author Info

  • Søren Bo Nielsen

    (Institute of Economics, University of Copenhagen)

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

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 89-16.

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Length: 25 pages
Date of creation: Aug 1989
Date of revision:
Publication status: Published in: Journal of Economic Dynamics and Control, 1991, 15(3) pp 569-588
Handle: RePEc:kud:kuiedp:8916

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Keywords: open economy macroeconomic theory; exchange rates and markets; monetary growth models;

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Cited by:
  1. Andreas Haufler & Søren Bo Nielsen, . "Dynamic Effects of an Anticipated Switch from Destination- to Origin-Based Commodity Taxation," EPRU Working Paper Series 96-16, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  2. AKITOBY, Bernardin, 1997. "Rigidité normale, dévaluation et équilibre général intertemporel," Cahiers de recherche 9708, Universite de Montreal, Departement de sciences economiques.
  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. 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.
  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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